Exhibit 1 Product Profitability Analysis

Valves

Pumps

Flow Controllers

Standard unit costs

$37.56

$63.12

$56.50

Target selling price

$57.78

$97.10

$86.96

Planned gross margin (%)

35%

35%

35%

Last Month

Actual selling price

$57.78

$81.26

$97.07

Actual gross margin

35%

22%

42%

Exhibit 2 Monthly Product and Cost Summary
Product Lines	Valves	Pumps	Flow Controllers
Monthly production	7,500 units	12,500 units	4,000 units
	(1 run)	(5 runs)	(10 runs)
Monthly shipments	7,500 units	12,500 units	4,000 units
	(1 shipment)	(7 shipments)	(22 shipments)
Manufacturing Costs				Monthly Total
Material	4 components	5 components	10 components
	2 @ $2 = $ 4	3 @ $2 = $ 6	4 @ $1 = $ 4
	2 @ 6 = 12	2 @ 7 = 14	5 @ 2 = 10
			1 @ 8 = 8
Total material	16	$20	$22	$458,000
Labor ($16 per hour including employee benefits)
Set-up labor	8 hours per	8 hours per	12 hours per	168 hours
	production run	production run	production run
Run labor	.25 hours per unit	.50 hours per unit	.40 hours per unit	9,725 hours
Machine usage	.50 hours per unit	.50 hours per unit	.20 hours per unit	10,800 hours
Manufacturing Overhead
Receiving		$20,000
Materials handling		200,000
Engineering		100,000
Packing and shipping		60,000
Maintenance		30,000
Total		$410,000
Machine depreciation (units-of-production method) $25 per hour of use				$270,000

Exhibit 3 Standard Unit Costs
	Valves	Pumps	Flow Controllers
Material	$16.00	$20.00	$22.00
Direct labor	4.00	8.00	6.40
Overhead @ 439% ofdirect	17.56	35.12	28.10
labor $
Standard unit cost	$37.56	$63.12	$56.50
Overhead
Machine depreciation		$270,000
Set-up labor		2,688
Receiving		20,000
Materials handling		200,000
Engineering		100,000
Packing and shipping		60,000
Maintenance		30,000
		$682,688
Total run labor = 9,725 hours $16 = $155,600
Overhead rate	682,688	= 439%
	155,600

Exhibit 4 Revised Unit Costs
	Valves	Pumps	Flow Controllers
Material	$16.00	$20.00	$22.00
Material overhead (48%)	7.68	9.60	10.56
Set-up labor	0.02	0.05	0.48
Direct labor	4.00	8.00	6.40
Other overhead (machine hour basis)	21.30	21.30	8.52
Revised standard cost	$49.00	$58.95	$47.96
Material Related Overhead
Receiving		20,000
Materials handling		200,000
Total		$220,000
Overhead Absorption Rate
$220,000	= 48% (materials cost basis)
$458,000
Other Overhead
Machine depreciation		$270,000
Engineering		100,000
Packing and shipping		60,000
Maintenance		30,000
Total		$460,000
Overhead Absorption Rate
$460,000	= $42.59 per machine hour
10,800 hours

Exhibit 5 Monthly Overhead Cost Activity Analysis
	Valves	Pumps	Flow Controllers
Receiving and Materials Handling:
Receive each component once per run	4 transactions (3%)	25 transactions (19%)	100 transactions (78%)
Handle each component once per run	4 transactions (3%)	25 transactions (19%)	100 transactions (78%)
Packing and Shipping:
One packing order per shipment	1 transaction (3%)	7 transactions (23%)	22 transactions (73%)
Engineering:
Estimated engineering work-order percentage (subjective)	20%	30%	50%
Maintenance:
	3,750 hours	6,250 hours	800 hours
Machine-hour basis	(35%)	(58%)	(7%)

1 Use the Overhead Cost Activity Analysis in Exhibit 5 and other data on manufacturing costs to estimate product costs for valves, pumps, and flow controllers.

2 Compare the estimated costs you calculate to existing standard unit costs (Exhibit 3) and the revised unit costs (Exhibit 4). What causes the different product costing methods to produce such different results?

3 What are the strategic implications of your analysis? What actions would you recommend to the managers at Destin Brass Products Co?

4 Assume that interest in a new basis for cost accounting at Destin Brass Products remains high. In the following month, quantities produced and sold, activities, and costs were all standard. How much higher or lower would the net income reported under the activity-transaction-based system be than the net income that will be reported under the present, more traditional system? Why?