...Destin Brass Products Co. Case study Cost Issues. Vales: Several competitors could math our quality but none had tried to gain market share by cutting price and gross margins had been maintained. Pumps: Our competitors’ sales prices are below our pump-cost calculation even when our manufactural process is better. Could not figure out how competitors making profit unless being subsidized by other products. Flow Controllers: We increased price by 12.5% with no apparent effect on demand. Peggy (controller) opinions are: 1) Material and labor cost are related to products produced. 2) Competitors marking different assumption about overhead costs. 3) Currently using traditional costing system-preparing financial reports and tax returns. 4) Introduced revised cost systems. 5) Proposed Activity based costing as initiated by Scott. Since Destin is not seeing any noticeable competition in the FC market, price could easily be raised the $3 to produce the 35% profit margin budgeted for (Exhibit 3). In the valve market Destin only has one customer. To have valve unit costs produce the 35% gross profit margin, an increase in price of $10 will have to be made (Exhibit 3). This will have to be carefully considered prior to execution. With such a drastic price increase, the one customer may go elsewhere for valves. The company could also look to expand it's customer base for valves, increasing the numbers of production runs, and help increase profit margins. If Destin were to no longer...
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...Destin Brass Products Co. Case Analysis Required Questions Solution Click Link Below To Buy: http://hwcampus.com/shop/destin-brass-products-co-case-analysis-required-questions-solution/ Purchase and read the case study titled Destin Brass Products Co. by William J. Bruns Jr. It should cost you $3.95. There is also a supplemental spreadsheet that you should download to work from. Disregard the questions at the end of the case. You should answer the following questions: Requirement #1 – Using Activity Based Costing to determine the cost per product. a.) Use Exhibit #4 to calculate the activity rates per each activity for the material related overhead and the other overhead amounts. b.) Use the rates you calculated in part a to calculate the total overhead applied to each product. (You should use the activities in Exhibit 5. Where activity numbers have been provided use the actual activity amounts not their percentages as the case writers have rounded their percentages. For example use the number of transactions 4 + 25 + 100 = 129 transactions not 3% + 19% + 78%) c.) Don’t forget to use the Material, Set up labor, and Direct labor, costs provided for each product in Exhibit 4. Requirement #2 – Compare the cost you got for Requirement #1 to the standard cost in Exhibit #3 and the Revised Unit Cost in Exhibit #4. What is causing the different costs per product between the three different costing methods? a.) Put all three costs on one spreadsheet so you...
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...Destin Brass Products Co. Case Analysis Required Questions Solution Click Link Below To Buy: http://hwcampus.com/shop/destin-brass-products-co-case-analysis-required-questions-solution/ Purchase and read the case study titled Destin Brass Products Co. by William J. Bruns Jr. It should cost you $3.95. There is also a supplemental spreadsheet that you should download to work from. Disregard the questions at the end of the case. You should answer the following questions: Requirement #1 – Using Activity Based Costing to determine the cost per product. a.) Use Exhibit #4 to calculate the activity rates per each activity for the material related overhead and the other overhead amounts. b.) Use the rates you calculated in part a to calculate the total overhead applied to each product. (You should use the activities in Exhibit 5. Where activity numbers have been provided use the actual activity amounts not their percentages as the case writers have rounded their percentages. For example use the number of transactions 4 + 25 + 100 = 129 transactions not 3% + 19% + 78%) c.) Don’t forget to use the Material, Set up labor, and Direct labor, costs provided for each product in Exhibit 4. Requirement #2 – Compare the cost you got for Requirement #1 to the standard cost in Exhibit #3 and the Revised Unit Cost in Exhibit #4. What is causing the different costs per product between the three different costing methods? a.) Put all three costs on one spreadsheet so you...
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...Destin Brass Production Company Contents Executive Summary ...................................................................................................................... 2 Problem Statement ....................................................................................................................... 2 Key Decision Criteria .................................................................................................................... 3 Alternatives Analysis ..................................................................................................................... 3 Recommendations ........................................................................................................................ 4 Action and Implementation Plan ................................................................................................... 5 Outcome Measure Specification ................................................................................................... 7 Textbook Questions ...................................................................................................................... 7 Appendix ....................................................................................................................................... 9 Exhibit 1. Net income in traditional and ABC systems. .................................................................. 12 Exhibit 2. Cost per unit based on ABC method .............................
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...Harvard Business School 5-191-029 Rev. April 27, 1993 Destin Brass Products Co. ost Teaching Note Substantive Issues Raised The managers of Destin Brass Products a y or P re struggling to understand the relationship between their costs and prices for each of the three products produced and sold by Destin. One of the products, pumps, is coming under increasingly competitive price pressure. As a result, Destin has been unable to maintain its desired profit margin. At the same time, Destin has been able to raise prices on another product, flow controllers, apparently with no effect on demand and no increase in competition from other manufacturers. As a result of these situations, management is increasingly questioning whether it knows the true manufacturing costs of its products. At the time of the case, Destin was using a conventional cost accounting system in which all overhead was allocated to product based on direct labor dollars. The controller had already recommended to the company president that they might consider a more modern cost accounting system with a somewhat more-refined allocation system, using material cost and machine hours to allocate overhead related to material receiving and handling. A third possible system in which overhead would be allocated based on transactions (an activity-based costing system, or ABC system) is described in the case by the manufacturing manager in such a way that the costs of products under that system...
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...Destin Brass Products Destin Brass produces three products used for water purification systems: valves, pumps and flow controllers. They are seeing high competition in the pumps market while competitors are reducing the prices on pumps. Because they do not have any design advantages to their product, they feel they need to follow the market and lower their prices as well. A meeting was held to discuss the declining profits and a proposal to change their overhead allocation method was proposed. 1.) 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. Based on the information in the case, the cost of valves is $39, the cost of pumps is $81 and the costs of flow controllers is $147. The breakdown of the analysis is below. Total Values Pumps Flow Controllers Manufacturing Costs Material Cost per Unit 16 20 22 Units per Month 7500 12500 4000 Material Cost per Month 120000 250000 88000 Labor Costs Production runs per month 1 5 10 Setup Labor Hours per Production Run 8 8 12 Run Labor Hours per Unit 0.25 0.5 0.4 Setup Labor Hours per Month 8 40 120 Run Labor Hours per Month 1875 6250 1600 Labor Costs per Hour 16 Setup Cost per Month 128 640 1920 Run Labor Cost per Month 30000 500000 256000 Machine Usage Costs Machine Usage Hours per Unit 0.5 0.5 0.2 Machine Usage Hours per Month 10800 3750 6250 800 Machine...
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...Case Study #1 Destin Brass Products Background Destin Brass Products is a local specialized brass products manufacturer in Florida. Brass foundries are purchased from suppliers and are machined and assembled in the company’s three product line. Valves, Destin’s first product line, is having a stable share in a mature market due to the precise specifications requirement and advanced manufacturing skills. Pumps, a product line generating 55% of the revenues is recently suffered from price cutting and profit decreasing due to competitive pressure. Flow controllers, a product line with little competition and a potentially growing profitability. The company is currently using a traditional volume-based costing system with direct labor cost as the allocation base. Problems and Issues The main problem faced by Destin Brass Products is the falling profitability of pumps due to competitive pressure. The competitors kept reducing price on pumps and Destin was forced to follow regardless of the high production costs. The key issue sits in the costing system. Destin is using a plant-wide rate to allocate all overhead with a base of direct labor dollars. However, each production line consumes resources differently and the direct labor dollars, materials cost or machine hours is not a proper measurement of the consumption for all the overhead in the cost pool. For example, in Exhibit 4, machine hours is not a cost driver for engineering, packing and shipping costs, so it should not be used...
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...ACCT 7107 Minor case 1 Destin Brass Products Co. 1. Background. Destin Brass Products is a company that manufactures pumps, valves and flow controllers. Roland Guidry is the president, Peggy Alford is controller, John Scott, the manufacturing manager and Steve Abbott, the sales and marketing manager, they held significant shares of this company. Pumps are the major production in the company but now they force to a situation that in this large market, other competitors reduce their prices. The revenue and gross margin of pumps begin to fall down. 2. Problems and Issues. The problem in this company is that they still using the traditional volume-based cost accounting system. From the exhibit 3 and 4 and what Peggy said, we can find that the overhead cost is large, but some of them have no relationship with the production run or labor cost, for example, the set-up labor, materials handling and the machine costing. When the overhead cost is large, the traditional cost accounting system is inaccurate. And for this company, they manufacture different products; allocate the overhead cost by traditional cost accounting system will also cause imprecise accurate. 3. Recommendation. Because the company uses the traditional volume-based accounting costing system, they allocate too much overhead costing into their product costing. And also, manufacture several products will make the OH inaccurate. So the solution for this company is to use the Activity Based costing, this...
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...Case #15 Destin Brass Products Co Harvard Business School Case #9-190-089 (Rev. April 24, 1997) Questions 1. Explain how costs are estimated in the three cost systems delineated in the case: (a) The traditional cost system, (b) the modified cost system, and (c) the activity based costing (ABC) system. How do you determine which cost system is better suited for a given company? The traditional cost accounting system in Destin is built on measurements of direct and direct costs and on assumptions about its production and sales activity. Each unit of product is charged for material cost and labor cost; material cost is based on the prices it pays for components , and labor cost is based on the standard times for run labor times the labor pay rate of $16 per hour. Overhead cost is assigned to products in two-stage process. First, the overhead costs are assigned to production- in Destin case it has only one production department so they are sure all overhead costs are assigned correctly at the first stage. Then, the total overhead costs assigned to production are allocated on the basis of production-run labor cost. Every $1.00 of run labor cost causes $4.39 of overhead to be allocated to the product to which the labor was applied. The modified cost system would be to forego the overhead cost allocation altogether. Overhead costs could be charged each month as period expenses. Product profitability would then be measured at the contribution margin level, or price less all...
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...Seligram, Inc.: Electronic Testing Operations 1. What caused the existing system at ETO to fail? 2. Calculate the reported cost of the five components listed in Exhibit 6 using: a. The existing system. b. The system proposed by the accounting manager. c. The system proposed by the consultant. 3. Which system is preferable? Why? 4. Would you recommend any changes to the system you prefer? Why? 5. Would you treat the new machine as a separate cost center or as a part of the main test room? Bridgeton Industries: Automotive Component & Fabrication Plant 1. The official overhead allocation rate used in the 1987 model year strategy study at the Automotive Component and Fabrication Plant (ACF) was 435% of direct labor cost. Calculate the overhead allocation rate using the 1987 model year budget. Why do you get different numbers? 2. Calculate the overhead allocation rate for each of the model years 1988 through 1990. Are the changes since 1987 in overhead allocation rates significant? Why have these changes occurred? 3. Consider two products in the same product line: Product 1 Product 2 Expected Selling Price $62 $54 Standard Material Cost 16 27 Standard Labor Cost 6 3 Calculate the expected gross margins as a percentage of selling price on each product based on the 1988 and 1990 model year budgets, assuming selling price remains constant and material/labor costs do not...
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...Jessica Turner has a master's degree in accounting and an undergrad degree in business. She established Turner Test Prep, a CPA exam review center, after being rejected by the Big Six accounting firms. She decided to bring the company into existence when she was searching for other employment options, and also because she had experience in the field when she worked at a review center's business office before taking up her master's degree. There, she inadvertently started teaching the math portion of the reviews, and received training in teaching. After passing the CPA exam on the first try herself, she decided that she would like to help those who want to take the CPA exam pass on their first try as well. And so she developed a business and marketing plan, convened with various professors to create a comprehensive curriculum, and opened her firm's doors. Instead of the normal review route of using books, software, or online courses, she provided a full service 6 week, 3-6 hours a day review regimen for her clients that include one hour live lectures from various professors, discussions about test taking skills and organizational skills to digest information faster, provided audiotapes that the clients can listen to at home or in their cars, executed timed mini tests as well as practice essay questions, one on one bi weekly client meeting to see how they've progressed and for them to ask questions, and a direct line to her via e mail for any queries the clients may have. She Even...
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...Topics/Case Descriptions Measuring Product Costs Case: Seligram, Inc.: Electronic Testing Operations Case Description: Explores the obsolescence of a cost system when technology changes. In particular, it asks students to increase the number of cost centers and allocation bases. The firm moves from a one-center, direct labor-hour system to a three-center, direct labor-hour and machine-hour systems. In addition, the case demonstrates how cost systems can induce subtle and not so subtle shifts in the strategy of the firm. In particular, we see how certain businesses are made to look inappropriately attractive or unattractive. Cost Behavior, Capacity Analysis and the Downward Demand Spiral Case: Bridgeton Industries: Automotive Component & Fabrication Plant Case Description: Bridgeton Industries was experiencing reduced sales. To become more competitive it introduced a classification procedure for products based upon their productivity and other factors. Products were classified into three groups: world class, potentially world class, and non-world class. The firm outsources the non-world class products. This outsourcing causes the costs on the remaining products to increase because some fixed costs associated with the outsourced products did not go away. These residual costs caused more products to become non-world class and hence candidates for outsourcing. The firm has entered the death spiral. Activity-Based Costing Case: Destin Brass Products...
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...First, remember that, with this case, we are addressing the “second stage” of the cost accounting effort. During this stage we “attach” a mission center’s costs to the products that pass through it. This is quite easy if all prod- ucts are the same, but more difficult if there is a mix of products. For example, in the Owen Hospital situation in the lecture, all dialyses were the same, so all we needed to do was divide the mission center’s total costs by the number of dialyses to get a cost per dialysis. However, in Destin Brass, there are three distinct products that pass through the mission center, such that the cost attachment effort is more complicated. Second, it is quite easy to attach direct material and direct labor to any given product. These can be computed at standard and are unambiguously associated with each product. For example, the direct material cost of a valve is $16.00 and the direct labor cost of a valve is $4.00. Third, there are two kinds of indirect costs in any given mission center that must be attached to the center’s products: (a) costs that are direct for the mission center but indirect with respect to any given product, it produces, and (b) costs that have been allocated into the mission center from a service center. In the Jefferson Multi-Media case, an example of the former would be the administrative salaries in the division; these salaries are a direct cost of the division, but indirect for any given product (such as a CD). An example of the latter...
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...Topics/Case Descriptions Measuring Product Costs Case: Seligram, Inc.: Electronic Testing Operations Case Description: Explores the obsolescence of a cost system when technology changes. In particular, it asks students to increase the number of cost centers and allocation bases. The firm moves from a one-center, direct labor-hour system to a three-center, direct labor-hour and machine-hour systems. In addition, the case demonstrates how cost systems can induce subtle and not so subtle shifts in the strategy of the firm. In particular, we see how certain businesses are made to look inappropriately attractive or unattractive. Cost Behavior, Capacity Analysis and the Downward Demand Spiral Case: Bridgeton Industries: Automotive Component & Fabrication Plant Case Description: Bridgeton Industries was experiencing reduced sales. To become more competitive it introduced a classification procedure for products based upon their productivity and other factors. Products were classified into three groups: world class, potentially world class, and non-world class. The firm outsources the non-world class products. This outsourcing causes the costs on the remaining products to increase because some fixed costs associated with the outsourced products did not go away. These residual costs caused more products to become non-world class and hence candidates for outsourcing. The firm has entered the death spiral. Activity-Based Costing Case: Destin Brass Products...
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