Case study: on costing systems and cost control

1816 Words Mar 30th, 2004 8 Pages
Lorson Manufacturing Company

Case Study

Executive Summary

Lorson Manufacturing Company is actively seeking to implement tighter cost control measures in an industry that is largely governed by prices. The purpose of this report is to present and analyse a new costing system proposed by Mr. Jan Lorson for the valve department of the company, and compare it to the existing system, in order to judge whether to go forward with its implementation.

The analysis uses a number of examples to highlight the significant differences in costs between the two systems, and the impact that these variances have on the business.

It is concluded that the new system does provide a definite improvement over the existing one, based on the benefits
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This would be performed using a suitable allocation base for each overhead cost, once again using the same principles previously followed to apportion overheads on a department basis. Overhead charge rates would then be calculated for each section by dividing total overhead costs per section by the corresponding labour hours.

Total cost per hour for each section would then be obtained by adding the labour rate to the overhead rate for the section in question.

Perceived Benefits of the Proposed System

Breaking down costs by section rather than simply by department (i.e. a further level of detail), definitely provides a better understanding of the cost structure, and represents an improvement for the following reasons:

*It reduces cross-subsidization of the different products, including the standard versus non-standard ones, thus arriving at more accurate costs and better analysis of profitability.

*It provides more realistic estimates for the costs incurred due to work done for other departments, thus providing more accurate cost allocations for the various products, which in turn leads to more accurate budgeting and planning of department costs.

*It enables cost control to be exercised by identifying on a month-by-month basis the areas where cost variances are occurring and easily tracing the reasons for these variances.

*It facilitates performance measurement and improvement, as well as increased operational
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