Cost Accouting Systems for John Deere Component Works

1990 Words8 Pages
Management Consultants

Executive Summary

John Deere Component Works (JDCW) has been subject to a number of unsuccessful competitive bids due to the inherent deficiencies of their existing costing system. This has illustrated the importance of obtaining a thorough understanding of costs, and desirability of implementing a superior costing system.

This report contains: * A general overview of the problems confronted by JDCW * An analysis of the current standard costing system * An exposition of Activity Based Costing (ABC) * An evaluation of the strengths and weaknesses of each system * Recommendations

Company Background

Deere & Company is an iconic American corporation, renowned for
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Following this revelation, management attention was directed to the current costing system.

Traditional Costing System

JDCW employed a traditional standard costing system throughout its operations. This form of costing permeated the industrial era, which was categorised by low overhead costs and the production of a limited variety of goods. Standard costing involves allocating overheads to cost objects using volume based cost drivers, such as machine or labour hours. Albeit easy to implement and understand, this system frequently results in over costing and under costing. JDCW priced their products based on full costs, which included all direct material, labour, overhead and period overhead, using standard costing. Whilst this practice was satisfactory for internal transactions, the inefficiencies were emphasised when JDCW sought to bid for parts against external suppliers. Number of machine hours, direct labour hours and material dollars were used as overhead allocation rates. By restricting the overhead rates to the aforementioned volume based activities, several problems eventuated.

The Industrial Engineering department used pre-established standard hours for direct labour runtime. Using standard hours produced costing discrepancies, especially because no emphasis was placed on direct materials, overhead and period overhead costs. This was an insufficient method to compare actual and standard percentages.

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