1. Use the Overhead Cost Activity Analysis in Exhibit 5 and other data on manufacturing costs to estimate product cost for valves, pumps, and flow controllers. Exhibit 1 shows the estimated product costs for vales ($37. 70), pumps ($48. 79), and flow controller ($100. 76) using the information provided in the Destin Brass case study. Exhibit 1: Estimated Product Costs for Valves, Pumps, and Flow Controllers 2. Compare the estimated costs you calculate to existing standard unit cost (Exhibit 3) and the revised unit cost (Exhibit 4).
What causes the different product costing methods to produce such different results? Exhibit 2 illustrates the unit costs for valves, pumps, and flow controllers using 3 different methods of calculation.
All three costing methods give us different cost/unit for each product because each method allocates overhead costs differently. Standard costing allocates overhead as a percentage of direct labor, regardless of the percentage of overhead used for each product. The revised method, allocates overhead at an absorption rate based on material related overhead.
ABC method identifies the cost of each activity and allocates overhead costs on a per item basis, taking into consideration the usage of each resource.
Valves have the lowest cost/unit using all three methods. When it comes to pumps, the standard unit cost and revised unit cost both show pumps as having the highest cost/unit, followed by flow controllers. However, ABC shows flow controllers with the highest cost/unit followed by pumps. Exhibit 2: Comparison of Costs 3. What are the strategic implications of your analysis?
What actions would you recommend to the managers at Destin Brass Products Co? Exhibit 3 shows that Destin Brass is losing money on flow controllers, with a gross margin of -4%, on valves, it is at its target gross margin of 35%, and with pumps has a high gross margin 40%. This might explain why the increase in prices on flow controllers has no impact on demand, the controllers are undervalued. It also might explain why competitors keep lowering prices on pumps while continuing making profits.
The ABC analysis shows that Destin Brass is also in the capacity of lowering its prices on pumps and keep making profit. To maintain its target profit margin of 35% and remain competitive in the market, Destin Brass needs to increase prices on flow controllers, decrease its prices on pumps, and maintain its prices on valves. Exhibit 3: Product Profitability 4. Assume that interest in a new basis for cost accounting at Destin Brass Products remain 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? Assuming that quantities produced and sold, activities, and costs remain the same for the following month, overall net income should be the same under both systems. However, net income per item would be different. The different methods don’t change the company’s total earnings (or profit), it only changes the unit/costs of the products, in this case, valves, pumps, and flow controllers.
Cite this Destin Brass Cost Activity Analysis
Destin Brass Cost Activity Analysis. (2016, Sep 14). Retrieved from https://graduateway.com/destin-brass-2/