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Zauner Ornaments -Costing and Pricing

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Zauner Ornaments Costing & Pricing Introduction Zauner Ornaments was a large manufacturer of crystal and glass products based in Vienna Austria. The company had an international reputation of producing high quality glass and crystal at affordable prices due to the skill of its master artisan and using innovative technology in the manufacturing process. Its product was used in fine restaurants, hotels and residencies around the world. Due to slowing growth in the fine-crystal and glass-tableware markets, the organization has expanded into producing glass Christmas-tree ornaments to take advantage of its Crystal’s unique capabilities.

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The company leased a small manufacturing facility in Taiwan to produce small glass ball ornaments, large glass ball ornaments and specialty glass ball ornaments. Yu, a new finance controller discovered that that sales department has set the prices of products according to competitors. Even though the company was profitable overall, it was not known if the prices set were sufficient to ensure that the individual product lines were profitable.

Chen, a senior analyst was tasked to perform an analysis of unit-product costs for each of Zauner’s three products.

In the first analysis performed by Chen, the cost per box for each product was calculated using traditional volume-based costing system. Budgeted overhead was allocated to each product line based on the planned production of ornaments which resulted in small glass ornaments costing more that its selling price. In the second analysis, overhead was allocated to each product based on direct materials and direct labor that showed product costs less than current sales price.

However, it was noted that both analysis were not based on the basis of the factors that caused the cost to be incurred unlike Activity based Costing (ABC) that traces overhead costs directly to products, processes, services or customers and helps managers to make the right decisions regarding product mix and pricing. Q1: Determine the best base for allocating plant administration costs. Plant administration cost included supervision, labor relations and clerical costs. We have studied the data given in Exhibit 4 & 5 in a case study.

We know that administration costs as indirect cost which one here is needed to allocate in each product line in proportion to resources used by each one. In Exhibit 4 trend of direct labor relates with increases in administration cost and second observation is each product line has different resource (labor) utilization based on ultimate finished product. All the three products were made on the same production line and specialty ornament products needed additional painting process. Hence labor parts in specialty product are comparatively higher than other two products.

Data mentioned in exhibit 5 states that labor costs are increasing in small to specialty product. Considering all these reason we have allocated plant administration costs in proportion to direct labor costs. Q: 2 calculate the ABC costs for each product on a per box basis. First step in any Activity Based Costing system is what activities are performed to manufacture three different types of the products i. e. Small glass ball ornaments, Large glass ball ornaments and Specialty glass ball ornaments.

Overhead resources used by each product vary product to product and hence it is needed to allocate the actual cost in their respective product line. In a given case of Zauner Ornaments various activities and cost driver identified in following table for proper allocation of overhead cost. Small glass ball ornamentLarge glass ball ornamentSpecialty glass ball ornament Numbers of ornament420000300000100000 Ornament per Box1261 Cost poolCost Driver Production SchedulingNumbers of Batch800750500 Machine SetupNumbers of Batch80070500

Equipment DepreciationNumbers of Operation per ornament445 Plant DepreciationSquare Footage per box10. 50. 2 Quality InspectionNumbers of inspection per box124 PackingNumbers of Boxes3500050000100000 Plant AdministrationNumbers of labor & supervisor DL8320093600520000 Allocation of Overhead costs against each activities (Working attached in excel sheet) Cost poolSmall glass ball ornamentLarge glass ball ornamentSpeciality glass ball ornament Production Scheduling766703109320740 Machine Setup93424817658400 Equipment Depreciation676726769484634 5639. 3311282. 3384634. 00 Plant Depreciation882454411517640

Quality Inspection100031999939998 Packing3500250005. 599992. 5 Plant Administration3582040290223860 Q3:–What do these results tell you about activity based costing versus costing based on standard volume or direct materials plus direct labor? We compared traditional volume based costing with outcome of ABC and following findings reported. Earlier Zauner was selling small glass ,large glass and specialty glass ball ornament at price of $9 ,$11 and $17 per box whereas price working out by allocating overhead cost using traditional volume based method coming to $21. 12 ,$13. 56 and $8. 43 respectively .

It is mentioning that management has not adopted accurate method of costing and correct base of pricing strategy. There is lot of price distortion if Zauner would have been made decision on volume based cost findings. It means that there are many issues with allocating overhead cost in various product lines. Here we have carried out ABC method and Findings are as tabulated below: Small glass ball ornamentLarge glass ball ornamentSpecialty glass ball ornament aTotal overhead cost per box9. 854. 105. 45 bDM &DL cost per Box4. 005. 007. 00 ABC CostingTotal Costs per Box 13. 859. 1012. 45

Traditional Volume based costingTotal Costs per Box 21. 1213. 568. 43 Difference (ABC-VB)Total Costs per Box -7. 27-4. 464. 02 Note: All figures are in USD Activity based costing (ABC) is the measure of cost/performance of cost objects (i. e. , small; big and specialty ornaments) activities and resources. In a nutshell, every cost object consumes activities and activities consume resources. How to allocate resource costs to activities based on their usage and how the allocated costs are re-allocated to the cost object based on its proportional use of those activities are the main concerns of ABC and management.

In Standard Volume based costing (SVBC), estimated overhead costs (Indirect costs) are presented as a lump-sum or a single account and proportionally allocated to the cost objects based on their planned production units. In the same analogy, allocation of estimated overhead costs based on Direct Materials and Direct Labor (DL+DM) assumes that the cost objects consumes the overhead costs in proportion to their consumption of direct costs. The above 2 costing methods are considered traditional costing methods.

In the case study, making use of SVBC returned a negative profit while DL/DM seemed to have “gone around the problem”. Our analyses in question 1 and 2 have clearly shown the differences in outcomes using methods of traditional costing and ABC. ABC Costing—> Cost per Box13. 859. 1012. 45 Volume Based Costing given in Exhibit121. 1213. 568. 43 DM&DL based costing given in Exhibit28. 2910. 3714. 51 Difference (ABC-VB)-7. 27-4. 464. 02 Difference (ABC-DL&DM)5. 56-1. 27-2. 06

Based on the results, we could explain that traditional cost methods are not thorough to have considered causal relationships between cost objects and activities and between activities and resources. For example, SVBC has returned higher costs for small and large ornaments while it has lower cost for specialty ornament as compared to ABC. Then, we have DL+DM having higher costs for large and specialty ornaments and lower cost for small ornament as compared to ABC. In ABC, estimated overhead costs are not treated as a lump-sum but are divided into various cost pools/activities.

Except for Plant Administration Costs, other activities costs have been assigned based on the cost drivers of the cost objects. The rationale provided by ABC is that not every cost object receives/consumes the same amount of “attention” or “activity” which consumes resources. In a simplistic example, indirect costs under plant administration cost such as finance, customer service and support or order processing and invoicing activities may not be as high for specialty ornament vis-a-vis the faster moving small ornament cost object.

Using ABC as a costing method, it resolves the problems of not able to accurately represent the opportunity costs of different cost objects; it better identifies activities that drive costs; it analyses activities rather than input resources and able to identify the cause-and-effect cost drivers for allocating estimated overhead costs. Q4:– What changes if any should management make to Zauner`s pricing strategy? Certainly company should change its pricing strategy base on new calculation of costs.

Though we can use current pricing strategy with loss in one segment and gain in others we better to calibrate our pricing strategy to compete in the market. The company till now have used traditional model to find its costs for each segment and profitability in general. Following we will analyze the marginal contribution analysis and identify the number of products should be produced with current selling price. And then we will compare the cost of production of each ornaments base on ABC model and conclude how to price our product basket to gain the most in margin.

In this case we assumed the overhead costs as fixed cost to calculate the break-even. Small Glass BallLarge Glass BallSpecial Glass BallTotal Selling Price per/Box $91117 Present Sales Volume (Box)3500050000100000 Sales US$31500055000017000002565000 Weigh of each product in mix 0. 120. 210. 661. 00 Flexible cost per item457 Contribution margin US$5610 Contribution margin ratio0. 5560. 5450. 588 Total contribution margin $17500030000010000001475000 Fixed Costs1170000 Profit305000 WACMR= Total Contribution Margin / Total Sales Revenue Small Glass Ball0. 0682

Large Glass Ball0. 1170 Special Glass Ball0. 3899 WACMR0. 5750 Break-Even sales (Traditional) 2,034,610 ItemTotal Sales Qty Sales Proportion of Small Glass Ball 0. 12 249,864 27,763 Sales Proportion of large Glass Ball 0. 21 436,271 39,661 Sales Proportion of Special Glass Ball 0. 66 1,348,475 79,322 As indicated in above calculation we should produce the mentioned qty for each segment to achieve the break-even point in sales with current sales price and current total costs.

At the moment the company’s production is beneficial, but not clear that which part is beneficial and which one is in loss. As mentioned in the first three parts the ABC method will indicate us expenditure for each product segment more accurately, that by current production schedule we need to change our prices for better margin and better cost contribution. With old method the target was not clear and just being above the break-even was enough and it was impossible to measure our performance internally and externally. Pricing strategy: Zauner have sold all these products at $9, $11 and $17 respectively.

If we compare the actual price outcome by ABC than we can conclude that small glass ornament loosing $4. 85 per box and other two products are overpriced. This may lead to lose competitive advantages and Zauner has to bear profitability for long term business. Higher marginal contribution is more attractive for any business. Following will be suggested to assure margins with no loss in any segments: Pricing Strategies Recommendation 1Applying target pricing strategy. This will help the company to have always in profit and also be flexible to add other fixed costs such as advertising.

As production cost for each segment is clear we can apply this model easily 2For small glass ball which we are in loss we should apply full cost pricing. It is worth to sacrifice this segment to keep our high margin in other two segments. By applying this strategy we will price our products with just full costs for each product. Though we would not gain from this part (base on new cost analysis of ABC method), we have a high margin in other two segments. 3To the point we can compete with these prices in large and special glass balls, we can continue with current prices.

We can gain high margin for advertising and create other advantages. It also gives us flexibility for promotion and special sales. www. bized. ac. uk Any change in any factors will result in change in our margins. Then by increasing production quantity we can decrease costs in first segment. References: 1-www. wikipedia. com 2-www. bized. ac. uk 3-www. wikipedia. com 4-U21 Global, 2004-2007- Performance Measurement and Control Systems; Segment -3, ABC method 5-U21 Global, 2004-2007- Performance Measurement and Control Systems; Segment -2, CVP 6-Williams, Haka, Bettner, Caecello “Financial and Managerial Accounting”, 14th edition

Cite this Zauner Ornaments -Costing and Pricing

Zauner Ornaments -Costing and Pricing. (2018, Mar 06). Retrieved from https://graduateway.com/zauner-ornaments-costing-and-pricing/

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