A business case is presented below to illustrate a business problem. Managers use their knowledge of managerial accounting to establish plans and make decisions. As such, you will be required to (1) identify the business problem, (2) analyze the problem, and (3) form a solution to the problem using information that you have learned in this course. In doing so, you will weigh various factors involved in the problem, make calculations, and draft alternatives to provide a solution. This exercise is being used to illustrate how many of the managerial accounting concepts that have been introduced in this course fit together.

This assignment is divided into three sections as follows:

Section A: Identification and understanding of the "Business Problem"

Section B: Analyzation of the scope, the underlying causes, and logical alternatives for the "Business Problem"

Section C: Solution strategy developed for the "Business Problem"

Data & Information

Background Information

ABC Company is a forty year old manufacturing company that produces products to customers' specifications. ABC uses a job-order costing system to assign/allocate product costs to its jobs.

ABC company began before companies had access to computers and over the years, conditions within ABC have changed. For example, as a percentage of total costs, direct labor has been declining and manufacturing overhead has been increasing. Many of the tasks previously completed by direct laborers are now being performed by automated equipment which is considered a component of manufacturing overhead. Also, the company has begun creating new products that differ in volume and complexity. Managing and sustaining their product diversity has required the company to invest more money in manufacturing overhead resources such as production schedulers and product design engineers.

Current Information

ABC has three manufacturing departments: Fabricating, Machining, & Assembly

Historically, ABC has used one plant-wide predetermined overhead rate with its allocation base being "direct labor cost." Direct Labor Cost is the allocation base used to apply manufacturing overhead costs to their jobs in all three manufacturing departments - fabricating, machining, assembly.

Mr. Smith, president of ABC is very angry. He commented, "We have just lost another bid on the Fuller Job by $2000. It seems we are either biding too high to get the job or our bid is too low to make our desired profit. This has been happening frequently on certain jobs and management finds the variation in its product costs vs its competitors to be confusing. ABC has been losing more bids than usual on certain jobs because of its recent price increase. It is customary in this industry to bid jobs at 150% of total manufacturing costs. ABC does not think their prices are too high. They believe their competitors' prices are too low. For some particular jobs, they feel that their competitors must be pricing below their cost. However on other jobs that ABC bid on, they are winning more bids than usual.

Upon reviewing ABC's product costs, the president has concluded that the material and labor variances were reasonable and adequate. In other words, he did not find a problem with direct materials nor direct labor costs or usage.

In allocating overhead to jobs, ABC computes one single plant-wide predetermined overhead rate annually on the basis of direct labor costs. This has been the company's approach to the allocation of manufacturing overhead to its jobs for the past forty years. The president has indicated in the past that the company should not try to "reinvent the wheel."

ABC's overhead costs include various items, such as the plants manager's salary, depreciation of equipment, utilities, property taxes, insurance, production scheduler's salary, product design engineer's salary and rent. The company considers all of its manufacturing overhead costs to be fixed costs.

Data

The first set of data listed below is based on estimates from the beginning of the year used to calculate the single plant-wide overhead allocation rate used to allocate manufacturing overhead to individual jobs/products.

Estimated Manufacturing Overhead Costs

Fabricating $350,000

Machining. $400,000

Assembly $ 90,000

Total Plant $840,000

Estimated Direct Labor Costs (allocation base)

Fabricating. $200,000

Machining. $100,000

Assembly. $300,000

Total Plant. $600,000

Jobs require varying amounts of work in all of the three departments. The Machining Department is highly mechanized in a highly automated manufacturing environment. The Machining Department relies on the use of machines much more than on labor. The processes in the Assembly department are "labor intensive." As such, this department requires a large amount of labor hours for it to function.

Managers use job cost information to quote bids. The Fuller Job, for example, would have required manufacturing costs in all of the three departments as follows. The Fuller bid was based on the following estimated costs.

Fabricating Department

Direct Materials. $3000

Direct Labor $2800

Manufacturing Overhead $_________

Machining Department

Direct Materials. $200

Direct Labor $500

Manufacturing Overhead $__________

Assembly Department

Direct Materials $1400

Direct Labor Costs $6,200

Manufacturing Overhead costs $___________

Total Plant

Direct Materials $4600

Direct Labor Costs $9500

Manufacturing Overhead Costs $___________

Manufacturing Overhead is allocated to each job based on one plant-wide allocation rate.

Assume that it is customary in the industry to bid jobs at 150% of total Manufacturing Costs (direct materials, direct labor, and allocated manufacturing overhead).

The president of ABC, Mr. Smith, has recently hired a managerial accounting consultant with considerable relevant manufacturing experience and has asked him/her to assist in identifying, analyzing and finding a solution for the business problem. At this time, the managerial accountant has reviewed all of the relevant information and is ready to share his/her identification, analysis and solution with the president.

YOU ARE THE MANAGERIAL ACCOUNTING CONSULTANT!

Refer to the above information to answer/discuss the following questions. Your answer will be broken down into 3 sections. You will be graded on Structure and Clarity within each section. Organize your answer into 3 sections. Please submit an individual "page" for Section A, Section B, and Section C. You will turn in a minimum of 3 pages. You will be graded on Structure & Clarity of Section A, Section B and Section C. DO NOT SUBMIT ONE CONTINUOUS PAPER.

Section A: Identification and understanding of the "Business Problem"

Section B: Analyzation of the scope, the underlying causes, and logical alternatives for the "Business Problem"

Section C: Solution strategy developed for the "Business Problem"

You must answer section individually. In other words, do not blend each section together. Your score will be calculated on the following two categories - STRUCTURE & CLARITY within each Section!

Structure:

1. How well you demonstrated an understanding of the "business problem." (SECTION A)

2. How well you performed an analysis of the scope, the underlying causes, and logical alternatives for the "business problem." (SECTION B)

3. How well you developed a solution strategy for the "business problem." (SECTION C)

Clarity of your written work:

1. Does the discussion of Section A, Section B, and Section C have a clear and appropriate beginning, development and conclusion?

Assignment due date: Thursday, March 4th

You will receive additional instructions regarding submitting your assignment either through Moodle or via e-mail.

Additional hints and guidelines for your discussion. Please use the following guidelines for your case discussion.

1. Section A: Identification and understanding of the "Business Problem"

Do not speak to the solution of the problem. Basically, in a nutshell issue a problem statement as to what their problem is and how they can begin to shed some light on it. Describe the nature of the issue at hand to demonstrate your understanding of the business problem. This would be a mere starting point for exploration. In other words, what are some possibilities as to why ABC company did not get the bid? Why is it important for the company to identify and address this problem. Who are the affected parties? In Section A you are focusing on the business problem as to the identification of it. What can the company do to protect against this type of business risk in the future? Focus more on managerial accounting concepts used in decision making and connecting the concepts that you have covered in this class. Remember, you will be graded on the "CLARITY" and the "STRUCTURE " of your answer.

2. Section B: Analyzation of the scope, the underlying causes, and logical alternatives for the "Business Problem"

Analyze the problem and offer alternatives based on your calculations. What are the logical alternatives? What are the underlying causes? What insights are revealed by the alternatives that you have suggested? Will the alternatives cause ABC company's prices to differ? Will the alternatives cause ABC company's cost of goods sold to differ? What managerial insight are revealed by the computations that you performed in this analysis. Remember- you will be graded on the "clarity" and the "structure" of you answer for this section.

3. Section C: Solution strategy developed for the "Business Problem"

What solution did you choose based on the data that you have? What additional data would you ask the company to provide to look for better solutions? And why would you need this additional data? Defend and support your solution.