Pump, Inc.

Acquiring management accounting data on real companies can be a challenge because this information is generally highly proprietary and of significant competitive value. The cost data below are for a medium-size family-owned pump manufacturing business located in the Midwest. (This business chooses to remain anonymous in order to keep its competitors from using these data to compete against it.) We’ll refer to this company simply as Pump, Inc.

Pump, Inc., had reorganized much of its production into manufacturing “cells”: selfsupervising work centers that produce complete products. The cell program was initiated because of a strategic decision (with no management accounting data to support it) to improve customer service. The financial impact of the program was unclear; the operational causes and the financial effects were murky. As a result, the management team at Pump, Inc., was having a difficult time evaluating the effects of its strategic decision to change most of the company to manufacturing cells. (Some of the production process continued to be organized as a typical production line, similar to what is demonstrated in the chapter.)

The current year’s cost data are presented below in the standard format typically used by the management accountant for Pump, Inc.

The management team, however, had a difficult time using the cost data in the typical format to effectively control and evaluate its reorganization decision. The management accountant was asked to reformat the data to make them more useful for the management team. After some analysis, the accountant decided to provide more detail by breaking down Manufacturing Overhead into subcategories organized by function: Indirect Materials, Indirect Labor, Factory Support, Occupancy Costs, and Non-Factory Support. The accountant also realized that she could divide all costs into two additional categories: People Costs (represent costs for wages and salaries) and Purchased Costs (represent costs for materials, supplies, and services acquired from outside agencies). The new report format is presented below.

Consider the two reports on cost data for Pump, Inc.
1. Do you think the new report format provides any additional information value for controlling and evaluating the decision to change most of the production process into manufacturing cells?
2. What costs do you think the management team at Pump, Inc., should pay careful attention to in its effort to better control costs in the production plant?
3. Most importantly, if you were on the management team at Pump, Inc., what additional data would you like to see the management accountant provide?

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Cost Category Direct materials Direct labor. Manufacturing overhead Typical Cost Data Format Total costs Cost Percent of Cost $433,966 54.55% 96,990 12.19 264,583 33.26 $795,539 100.00%