Destin was manufacturing 7500 units per month Pumps 55% of the revenues also required the same setup. Often readers scan through the business case study without having a clear map in mind. Ab so rp ti on : The process by which overheads are finally included in the cost of production of product. Fear could have been a powerful persuasive technique used by the authority figures. This results in much of the costs being allocated to Valves instead of Flow Controlers, making the Flow Controlers appear much cheaper. In which the overhead is allocated to a material overhead and another overhead base, based on the machine hours, as well as accounting for the set up labor costs for every run.
What are the relevant Facts? Because the company uses the traditional volume-based accounting costing system, they allocate too much overhead costing into their product costing. Moreover, company should analyze the market demand and supply to understand the most applicable profit margin. Moreover, financial experts support the idea that direct costs is not the actual problem as this can be tracked to the product, but the issue is that costing calculations gets complicated when trying to allocate the overheads Indirect costs. 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. Case solution has a team of experts who are knowledgeable and experienced in the field of writing. In some cases you will able to find the central problem in the beginning itself while in others it may be in the end in form of questions. At the same time, Destin Brass had found that the price elasticity of demand for Flow Controllers was relatively inelastic, when it increased prices by 12.
When we are writing case study solution we often have details on our screen as well as in our head. She was outgoing though sometimes a little selfish and mischievous. Strategic implications of the financial analysis According to Bhimani et la 2008 , highly competition business environment requires a comprehensive costs understanding, and a proper costing strategy is essential to facilitate decision making. The new estimated costs are more accurate because the amount allocated to each of the overhead activities for each product is more detailed. The remaining overheads are allocated on the basis of machine hours. You should try to understand not only the organization but also the industry which the business operates in.
You can also send us your details through our email id support assignmentconsultancy. . Use the Overhead Cost Activity Analysis in Exhibit 5 and other data on manufacturing costs to estimate product costs for values, pumps and flow controllers. These can be computed at standard and are unambiguously associated with each product. Foreign companies use foreign currencies for their expenditures, hedging strategies, and investing and financing activities. Handling cost is the biggest cost of overhead cost, in flow controller, handling cost is 54% of the total overhead cost. What causes the different product costing methods to produce such different results? Ac tiv ity bas ed cos tin g: The method of costing in which every cost is traced by appropriate cost driver which is based on the level of activity.
. By reallocating the overhead costs more accurately, we found the profit margin should be doubled to 40%. The company is currently using a traditional volume-based costing system with direct labor cost as the allocation base. As mentioned by Peggy Alford, this gives an thought why rivals are cutting monetary values on pumps. The staying operating expenses are allocated on the footing of machine hours. Why has the company not seen any competition in the flow controller market even with a recent raise in their price to consumers? Issues Peggy Alford was saying that competitors were using the modern approach of and it was giving them less cost per unit.
This paper will exemplify the recommended solutions for the direction of the company that are seeking to measure the competitory tendencies of the market for the mentioned merchandises, and seeking to get down new schemes to cover with these tendencies. Creating a cost pool for receiving and material handling costs by calculating the number of transactions consumed for every product. The only relevant costs considered in this chapter are ordering costs, holding costs, and stockpot costs. Alex Fries, a German immigrant with a background in chemistry, settled in Cincinnati during the early nineteenth century and a few years later established a flavor company. This indicates that the inaccurate costing allocation can lead to either over or under pricing. Ab so rp ti on co st in g: The process of costing in which overheads are absorbed in product cost using some suitable method.
The oil industry has ever been fertile land for analysis of the grounds and effects perpendicular integrating. Recently, Destin has been facing increasing price competition on their line of pumps which is causing them to continually reduce prices resulting in lower margins. It takes one large overhead cost pool and breaks it down into several pools, which for this company are: receiving and materials handling, machine usage and maintenance, packing and shipping, and engineering. Currently the most revenue is coming from the production of pumps; however, due to the fact that competitors are dropping their prices there is a concern for how to maintain the gross margin for pumps. The material related overhead is determined by dividing the material related overhead by the total material costs, generating a material overhead rate in this case of 48%. Alex took the control in 2001 in order to implement a process of modernization of the company.
In Exhibit 3 Standard Unit Cost is the applied accounting method. This large profit could entice other companies to shell out the money in start-up costs and start competing. Words: 709 - Pages: 3. A meeting was held to discuss the declining profits and a proposal to change their overhead allocation method was proposed. The premise has a solid hook with the idea of a cursed necklace that brings good luck and fortune to one, but bad luck to others. This will have to be carefully considered prior to execution.