Accounting Case : Tijuana Bronze Machine

1- The total unit cost = Total Variable Cost + Production Fixed Expenses + Advertising Expense + Selling and Administrative Expense = 3.23 + 1.20 + 0.30 + 0.19 = 4.92.

In using the ABC system, Valves and Pumps are matching the company’s target of 35% of gross margin apart from Flow Controllers. With the use of TAC, the gross margin on pump sales is 19.5% that well below the company's target gross margin of 35%. This indicates that the current overhead cost allocation practice did not reflect the real costs incurred on the products. The lower actual gross profit obtained was mainly due to wrong cost allocation on the pump product.

11. If 8,000 units are produced, what is the total amount of manufacturing overhead cost incurred to support this level of production? What is the total amount expressed on a per unit basis?

“Auerbach Enterprises uses machine hours as the cost driver to assign overhead costs to the air conditioners. The company has used a company-wide predetermined overhead rate in past years, but the new controller, Bennie Leon, is considering the use of departmental overhead rates beginning with the next year. “(Schneider, 2012). One product is affected more than the other by use of departmental rates rather than companywide rate.

Unit Break-even Volume = Total Fixed Costs/Contribution per unit = $525,000 - $6.40 = 82,031.25units

435% being the overhead rate calculated for the whole pool, at budget time for the model year.

Professional fees Property taxes on factory building Raw materials used Rent on production equipment Research and development Sales commissions Utility costs—factory Wages—factory Totals © 2008 For Instructor Use Only Direct Materials Product Costs Direct Manufacturing Labor Overhead Period

* The Pumps total product variable costs are $406,250, the Pumps total fixed costs are $316,501.94 and the Activity Based Costing Pumps cost per unit it $58.

shipments x 500$ 70 nr. shipments x 500$ 220 nr. shipments x 500$ number of units per batch total overhead cost overhead cost / unit cost per unit

investigation has revealed that $211,000 of the fixed manufacturing expenses and $122,000 of the fixed selling

Under the existing cost system for the turning machine area, there are two direct costs and three cost pools for overhead costs. The two direct costs are simply Direct Labor and Direct Material, which are traced to the cost object, which is Machine Parts. The total overhead is split into three cost pools, which are the following: overhead applied on direct labor, overhead applied on material dollars, and overhead applied on ACTS machine hours. Furthermore, each cost pool is broken down into direct and period sub categories. The mentioned cost pools for the following cost drivers: Direct Labor dollars, Material dollars, and machine hours.

CC cost p/unit = ($3,800 + $1,975) / (2,400 + 1,600 + 3,000 + 2,625) = $5,775 / 9,625 equivalent units = $0.60

Currently, Orion produces the valve at a cost of $8,000 per unit and sells each unit for $10,000; resulting in a 25% mark-up. Orion has agreed to sell the modestly improved valve for $12,000 per unit when the variable costs alone are $10,500; $8000 per-unit manufacturing costs and $2,500 per-unit comprehensive test procedure costs. Orion has decreased its profit margin to 14% without even considering fixed costs. If the short-cut approach works, fixed costs would be $200,000, and Orion needs to sell 133.33 units to breakeven. If the software design takes eight months, fixed cost could be as high as $440,000 and Orion would need to sell 293.33 units to breakeven. However, with a dramatically improved valve and fixed costs of $200,000 Orion will breakeven after selling 20 units and with fixed costs of $440,000, Orion will breakeven at 46.3 units.

“Seiring dengan berjalannya waktu, menjadi jelas bagiku bahwa kompetitor-kompetitor kami gila. Pompa adalah produk utama dengan pasar yang besar untuk kami semua, tetapi dengan sikap pemotongan harga yang banyak dilakukan, tidak ada dapat menjual pompa dengan menguntungkan selama kami semua dipacu untuk menyamakan harga dengan harga terendah kompetitor. Saya pikir kita harus bersyukur bahwa kompetitor tidak bermain dalam permainan bodoh yang sama dalam pengatur katup dan aliran. Bahkan dengan kenaikan harga sebesar 12,5%, kami tidak melihat adanya kompetisi baru dalam pengatur aliran”.

The engineer of company is concerned about the recovery of overheads. The company has implemented traditional system of overheads recovery based on direct labor hour and is recovering overheads at $3,000 per labor hour. The direct labor cost is only about 5% of total cost of production. The design engineer seems to be correct in his opinion that a slight variation in direct labor hour is going to affect the cost of product in great sense. If there is mistake in estimation of direct labor by half an hour it will increase the cost by $1,500. The direct labor hour is used as driver for recovery of overhead. One hour increase will lead to increase in cost of product by $3,000. The design engineer has observed that in past years there are less direct labor hours and the overhead rate keeps going up and up. This may be due to increase in overheads. The engineer is also concerned about the estimates that swing the bids of company due to recovery of overheads on the basis of direct labor hours and it is disadvantageous to the business to the business of company. The inefficiency of labor or idle time can lead to the wrong estimation of cost of product.