Company A is a large manufacturer of oil tanks, located in Troms, Norway. The company has certain problems which are showcased in the text below.

Q1: Analyze the problem and give advice to the advantages of switching to machines hours as the overhead recovery base.

Q2: Show how an ABC-system would change the analysis of the costs between the standard and the specialist products.

Q3: Advice on the implementation of an ABC system. How can Anna's fears be allayed? Make a suggestion to Anna how to deal with the problem.

Company A is a large manufacturer of oil tanks, located in Troms . Norway. Since the firm has been established in the 1970 s the firm has seen a steady growth in both sales and profits. The founder's daughter Anna joined the company after graduating with a MSc in Industrial Economics and Technology Management at University of Agdar. One of her first tasks was to revise the costing system, as there was a need for more precise product cost information to support company's strategy of offering keen prices in a highly competitive market dominated by a few large firms. Anna had faced considerable opposition to the changes she had suggested, with several managers being willing to accept the shortcomings of the old system because they had "learned to live with it". Anna on the fight because of her father's support as the latter was convinced to "learned to live with" was a euphemism from "learn to manipulate to your own advantage . Anna's father has now retired so that Anna is now conscious of the need to prove herself. Accordingly, the last thing she wants to present is the upset of another major change in the costing system. However, profits are below budget and the Head Controller is critical of the current costing system, saying that it is hopelessly out of line with the company's updated manufacturing methods and also with the current theories in product costing. He says, "we are still absorbing overheads on labor-hours and we have an absurdly high overhead absorption rate of $150 per labor-hour. We are pricing ourselves out of the market on our old established products. Product costs would be more meaningful if we absorbed overheads on machine-hours." Anna decides she must look deeper into this issue. Over the past five years, overhead costs had risen to $800,000 per month, a 46% increase, while direct labor-hours have risen from $168.200 to $170,000, a negligible amount. The product processes are now largely automated. Direct labor-hours are 4000 compared with machine-hours of 6500 (however, it is possible that some labor is still being classed as direct when in fact changes in technology have altered its nature to indirect). She asks her product manager about the rise in overhead costs, causing him to virtually explode: "How can I keep costs down when marketing ignore our standard specification and insists on 23 different version of every product? I need more specialized engineers to monitor the changes and this is not cheap! Also there are completely new parts coming through from design with huge material costs, materials handling is really a nightmare. And the number of specials going through on small production runs continues to increase. I need many more setups per shift that is skilled work, but you can't pick up the sort of skilled labor easily, so overtime is through the roof." Anna talks to the marketing manager next: "We are facing fierce competition for your bread and butter, high volume lines and we just can't match the low process in the market. However, we have successfully increased our sales of more specialized tanks despite an increase in process forced on us by production. So we are meeting our overall sales targets and as we encourage this trend towards the higher margin specialist products, our profits will rise. I don't see any problem here at present but there will be if you don't make product get control of the cost increases." Anna puts the information together and gets frustrated by the inconsistences: "We are meeting our sales targets but product costs are rising because of the switch to specialist products. However, as these are sold at high margins, we should be improving profits. I don't understand why profits are failing. " As Anna designed the costing system, she is reluctant to admit that it is at fault and she remembers clearly the opposition she had when she last recommended changes. She no longer has her father's support, so she decides to call a former friend from studies at UiA Peter - who is now a consultant specialized in cost and control systems in Oslo. Peter should help identify the problem and to advice on the necessary changes and on a suitable implementation policy. Anna supplies Peter with the following information: Please answer the following questions by showing your calculations and by commenting on it - make a suggestion to the management: a. Analyze the problem and give advice to the advantages of switching to machines hours as the overhead recovery base. b. Show how an ABC-system would change the analysis of the costs between the standard and the specialist products. c. Advice on the implementation of an ABC system. How can Anna's fears be allayed? Make a suggestion to Anna how to deal with the