case analysis

1. identify and discuss feasible solutions to the costing problem the company faces.

2. explain how the costing systems you select apply to the case and solve/address the costing problems the firm is facing.

3. explain how the costing system being discussed fits with and addresses the issues the firm is facing.

case

Jetson Engineering (JE) is a specialist structural steel engineering firm who design and produce structural steel items for new and existing buildings.The recent focus on earthquake strengthening buildings has created significant additional work for JE which has led to issues with the timely completion of design work.

The increased design work has pushed the computer-aided design system (called the A2 Designer) beyond its intended capacity which has resulted in slow response times and significant additional support costs for the system.Colin Wilson, the production manager, decided to purchase a new computer system (called the DesignMaster) to absorb some of the additional work.

The DesignMaster system was purchased in October 2017 and has been operational for 5 months.Colin has noted that few of the engineers are using the new system even though it has several features thatsimplifythe design work, enable faster completion of some designs, and therefore allow more time to complete the fabrication of steel items.The low usage means the DesignMaster system (the new system) hassignificantexcess capacity and the existing A2 Designer system is still experiencing heavy demand, low response times and significant additional support costs that are caused by the heavy workload put on the system.

Colin discussed the situation with the supervisors of thefirm's sixdesign teams.They explained that the accountants allocate the cost of each computer system to their work based on the number of hours they use the computer system. One supervisor responded that "as the A2 designer system is highly utilised (even the accounting function uses it) and its purchase costs were low, the calculated cost per actual hour is very low.The new machine, on the other hand, has a high purchase cost and in the first fewmonths,we didn't use it very much as it takes a significant number of hours to learn how to use the new system.Because of this high cost and lowusage,the allocated cost per hour was incredible. This high allocated computer cost makes our job costs high which makes our performance look bad".The supervisor went on to explain how next month he planned to use only the A2 Designer system (i.e. old system) as it would produce the "best" cost for the jobs he had scheduled - "It will take longer but will cost us less so the A2 Designer system is the best system to use".

Colin continued his discussions with Bridget Duns, the firm's management accountant.She explained the costs of the computer systems are allocated to jobs on the basis of actual hours of operation each month.Bridget helpfully explained "We use actual costs as we have to allocate all costs to get full job costs so we can get accurate profit figures for each job.These profit figures are used to evaluate the performance of each job.We use actual hours as this ensures each month's costs are allocated in full to the activity for the month. We also use actual costs for each month so we calculate the overhead rate each month and apply it to jobs at the end of the month.Actual costing gives the most accurate allocation of costs".Bridget goes on to state "Surely you agree accuracy is the most important aspect of any cost allocation?"

Colin is concerned that the investment the firm made in the DesignMaster system has not resulted in any improvement in the design process and seems to have just increased costs.He wonders how the cost allocation process could be changed to encourage engineers to use the two systems more effectively.Colin approaches you as a newly appointed graduate management accountant to see if you can provide a solution.