|SUBJECT: |Bridgeton Industries Case Study |
|TO: | |
|FROM: | |
|DATE: | | | |
| | | |…show more content… The current cost system allocates overhead costs once a year, as a function of direct labor dollars. This allocation strategy results in:
• Inaccurate allocation due to products at various levels of automation • No incentive to reduce the cost of materials • A situation where a reduction in production will result in less overhead allocated to the respective product • Lack of incentive for employees to continually reduce their costs throughout the year as a result of the annual calculation of overhead allocation.
Assuming that the company’s goal is to maximize profits, the current cost system is not an appropriate tool for strategic planning. The ambiguity of the overhead costs per product makes it difficult to accurately analyze the cause and effect relationships of changes and/or improvements to specific product line.
If the cost system reported sales volume and/or price we would be able to conduct an activity analysis to determine an appropriate cost function to determine the best cost driver for each product.
4. Manifold Recommendation Based on Current Cost System
If we assume that the 1991 products, prices, sales volumes, materials costs and overhead are unchanged from 1990 and that there are no process improvements that would lead to a reduction in the direct labor of a product, it can be inferred that the company’s profits would be identical to those of 1990, as stated in Appendix B. However, if the same is assumed