Question
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 (%)
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% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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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 incomethat will be reported under the present, more traditional system? Why?
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