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ACCOUNTS CASE STUDY:

DESTIN BRASS PRODUCTS CO.


(Group -1)
THE COMPANY
Established in 1984 by Abbott, Guidry, & Scott
Then selected Peggy Alford, accountant with manufacturing
experience to join them.
Steve Abott sensed opportunity in a conversation with the
president of a large manufacturer of water purification
equipment who was dissatisfied with the quality of brass
valves available
Company grew quickly due to water purification equipment
demand & it became sole supplier of valves to its customers
Expanded their business to pumps and flow controllers
Gets supplies from foundries via JIT deliveries
Brass is then precisely machined and assembled in Destin
Brass facility.
THE PRODUCTS
Valves
24% of company revenues
Created from 4 components
Each machinist could operate 2 machines and assemble
valves as machining was taking place
Expense of precise machining made the cost of valves high
All monthly production took place in single production run,
shipped to single customer upon completion
Pumps
55% of company revenues
Created from 5 components
Shipped to 7 distributors
Scheduled for 5 production runs each month
Price under pressure-felt that Destin had no choice but to
match the lower prices as quoted by competitors or give up


THE PRODUCTS(CONTD.)
Flow Controllers
21% of company revenues
Created from 10 components
22 shipments
More components needed for each finished unit and
more labor required
4000 FC in 10 production runs
They felt-No competition in market.

THE MEETING-COST ISSUES
Valves
Several competitors could match their quality but none had
tried to gain market share by cutting price and gross margins
had been maintained.
Pumps
Their competitors sales prices were below their pump-cost
calculation even when they had a much better manuf.
Process.
Could not figure out how competitors making profit unless
being subsidized by other products
Flow Controllers
They increased prices by 12.5% with no apparent effect on
demand.
Why arent others entering the market?
PEGGY-THE ACCOUNTANT
Currently using traditional costing
-Allocation done in 2 stages: first to production then on
the basis of total run labor cost
Introduced revised cost system
-Allocation in 3 cost pools:
a. material related overheads: receiving and handling
b. setup labor cost
c. machine hours related overheads: remaining overheads
Proposed Activity based costing
-Allocation on the basis of transactions
QUESTIONS
ABC Costing
Comparison Of ABC Costing with Standard Method.
Comparison Of ABC Costing With the Revised Method Of
Costing.
Use the overhead cost activity analysis in exhibit5 and
other data on manufacturing costs to estimate product
costs for valves, pumps and flow controllers
QUESTION 1
Compare the estimated costs you calculated to existing
standard unit costs (exhibit-3) and the revised unit
costs (exhibit-4). What causes the different product
costing to produce such results
QUESTION 2

What are the strategic implications of your analysis? What
actions would you recommend to the managers at destin
brass products co.?
QUESTION 3
IMPLICATIONS
No change necessary for valves
a. Cost reallocation did not change profit margin (35%)
b. Revised method is not a good method of allocation of overheads,
hence allocation should be based on the activities.
Pump prices can be lowered
a. Using ABC, pump profit margin is 40% that is why the competitors were
sustaining the market by lowering their prices
b. If priced as low as $75.06, profit margin would be 35%. Hence price can
be decreased also to survive the competition.
c. Implementation of ABC is justified
Raise flow controller price or get out of market
a. ABC revealed that there is a -4% margin at a price of $ 97.07 that is
why even by increasing the price to 12.5% there was no increase in
demand.
b. $155.25, they reach the 35% profit margin otherwise with current prices
company is suffering
How much higher or lower would the net income reported
under the activity-transaction-based system be than the net
income that will be reported under the present, more
traditional system? Why?

QUESTION 4

There should be no difference in NET INCOME
They are reallocating total expenses differently
amongst the products
There will be no differences in total expenses
But if according to ABC, they change the target selling
price then, they will get better profit margin
Whereas with the same actual selling price, they can
get-
Profit margin for valves w.r.t traditional remains same
Profit margin for pumps w.r.t traditional increases
Profit margin for flow controller w.r.t traditional decreases

CRITICAL ANALYSIS

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