As the new controller hired to make BBP a world class organization, use the case approach to put forth recommendations for a cost system that will help in accurately pricing quotations. 
Butler Better Products (BBP) Tom Butler's Butler Better Products (BBP) has just gone public. As a creative and skilled engineer, Tom develops technologically advanced machinery and moulds, which provide BBP with a competitive advantage. Above average profits come from the technological advantages, but only temporarily as competitor imitation takes between six months and one year. Tom has two tactics for addressing this technology copying. First, he plans and works towards continuously introducing technological improvements in processes and products. For example, there is an ongoing goal for production costs to decrease 8 percent a year. Second, BBP stresses new products. For example, there is a policy that 25 percent of the sales each year must come from products introduced in the past five years. BBP is in the plastic products industry, specifically in the rigid packaging sector. Its products include pop bottles, cosmetic jars, beverage cases, dairy cups and tubs, food trays, pails, and oil containers. In the industry, there are constant modifications and improvements in machinery and processes. Technology is becoming an increasingly important competitive factor in productivity as are product quality and performance. The industry is being pressed to increase the use of higherperformance polymer materials, instrumentation, controls and automated materials-handling techniques in its processing operations. While these technologies continue to be generally available, they are more demanding in their implementation, and operation and maintenance, reflecting a greater need for higher levels of labour and management skills. Such skills are generally scarce. This is not so with BBP. BBP is one of the few Canadian organizations that have developed extensive research and development capabilities. The Canadian market is not large enough. The free-trade agreement with the United States, and the reduction in the tariff barrier that protected Canadian rigid packaging organizations, has forced BBP to compete in a larger market. In this larger market, competition is aggressive and persistent. In addition, waste disposal difficulties with plastics have placed pressure on the industry for solutions. BBP and its competitors have reduced the amount of plastics used in given applications and developed means for economically recycling plastic materials. Additionally, the trade association, the Society of the Plastic Industry of Canada, has a very active program to educate the public about the role of plastics in the environment and to implement viable technologies in Canada that will reduce the amount of plastic materials that eventually reside in landfill sites. The performance advantages of plastics over competitive products, assures their status as a material of choice in a wide range of applications. Because of evolving global marketing strategies, including rationalization, and tougher competition due to lower tariffs, the industry will not maintain the past rate of growth. Nevertheless, the growth rate will continue to exceed that for the Canadian manufacturing sector. A technological advantage of BBP is that production set-up can be done relatively quickly and inexpensively. Consequently, five basic moulding machines produce nearly 100 different products. This is a sharp improvement from earlier technology which would have required 20 or more moulding machines. Tom wants accurate product costing for profitable expansion. As the organization is new, he believes the time is appropriate for developing a costing system that is accurate and efficient. Tom has some understanding of job-order and process costing systems and standard costing, but he does not know what to use as the organization grows. You have learned the following about BBP: There is a sales staff of eight persons, who are located throughout Ontario, Quebec, and Northeastern United States. Agents are employed in Atlantic Canada. Sales persons contact clients, former clients, and prospective clients for orders. With product design engineers and the production scheduling manager, the sales person prepares a quotation. Generally, an order is for a certain quantity of a specified product. It will be for a future period, generally a year; with delivery being on a regular schedule or as requested if the client organization uses a JIT inventory system. Product pricing is a mark up of 20 times the cost of direct materials. All other costs are indirect. The mark up gets reduced if necessary to obtain an order. Tom must approve all \"markdowns,\" which he does automatically if the sales person requests. As long production runs reduce set-up costs, products are often inventoried for clients. There is no charge for this service. The indirect manufacturing costs are many times larger than the materials costs, as shown below. With 27 months of data, you run simple regressions to understand what drives the various indirect cost categories. Exhibits 1 and 2 show the operating statement and the regression equations, respectively. Exhibit I Butler Better Products Operating Statement For the year ended December 31 Revenue Expenses Materials Machine room Warehouse Set-up Shipping Engineering Administration Selling and marketing Total expenses Operating Income $43,152,750 4,226,740 15,071,788 5,877,224 1,548,119 1,122,487 1,740,821 1,950,298 3,477,844 35,015,321 $8,137,429 Exhibit 2 Dependent Variable 1. Set up costs 2. Set up costs 3. Warehouse costs 4. Warehouse costs 5. Shipping costs 6. Shipping costs 7. Machine room costs 8. Machine room costs Independent variable Number of set ups Number of orders Square feet Size of order Size of order Number of shipments Through-put time Machine time Constant $97,869 154,872 769,072 319,543 54,912 24,108 671,564 974,653 Slope $2,721 482 7 0.54 1.23 374 119 197 Note: For the slope or beta, the t-value was equal to or greater than 2 for equations 1, 3, 6, and 7 and less than 2 for the others. T-values greater than 2 are considered statistically significant between the dependent and independent variable. T-values less than 2 are not good indicators of cause and effect relationships. Required: As the new controller hired to make BBP a world class organization, use the case approach to put forth recommendations for a cost system that will help in accurately pricing quotations
