Destin Brass

1. For financial accounting purposes, what is the total amount of product costs incurred to make 10,000 units?

Overhead costs are not in proportion to the production output because of the method they are using. This leads to inaccurate pricing and costing decisions. An Activity Based Costing System would help find the real relationship between the products produced and overhead.

One of the major benefits of expansion is the reduction of fixed cost (fixed and selling). The cost is absorbed by 85,000 units instead of 80,000 units resulting in saving of $0.42 per unit.

3. If a cost is identical under each alternative under consideration within a given decision context, the cost is considered:

“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.

3. Briefly describe how the current production cost assignment system works. What are the consumption ratios (activity percentages) for assigning manufacturing overhead to each product at present?

Under an ABC system, the allocation of costs to products is achieved through at least four analytical steps. Firstly, costs are grouped into activity levels. Secondly, cost drivers are

Under a traditional system, overhead cost is allocated to an activity based on hours or rates for direct labor or machine usage. However, this approach does not clearly indicate how much overhead cost will be needed in order to complete a job through a particular function. ABC methodology is to be used as an alternative to traditional accounting where a business 's overhead costs (indirect costs such as electrical energy consumption for heating or cooling, or indirect cost associated with marketing) are allocated as a proportion of direct costs, to an activity. This approach is unsatisfactory because there can be cases where two activities could absorb the same direct costs

uses budgeted fleet hours to allocate variable manufacturing overhead. The following information pertains to the company 's manufacturing overhead data:

In using ABC overhead costs are distributed differently across the three products, but in total they are the same, in total. However, ABC changes the information that managers receive to make effective business decisions, which will ultimately result in improved business results.

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

1. Use the Overhead Cost Activity Analysis in Exhibit 5 and other data on manufacturing

7. Though numbers given in the cost data can not be contested, I would definitely contest the way total cost has been computed. The item 345 department operates within a large manufacturing facility that churns out number of other products too. Hence judging the profitability of item 345 on the basis of total cost is not practical.

Assigning the overhead costs to the products shows how profitable the products are after deducting all cost. However, it is important to find the appropriate method of overhead cost allocation. In Sippican’s case the traditional accounting method is used, which does not reflect the real resource usage of the different product lines. The correct method in this case would be to apply the time-driven ABC approach for cost allocation. Such method apart from showing the actual profitability after all cost deductions also depicts the differences in resource usage rates between the products and, thus, allows for identification of cost drivers. A contribution margin

The major problem faced by Destin is that pumps are losing profits due to intense price competition. Destin was forced to match the continuously reduced price from its competitors despite of the high production costs. As a result, the gross margins in the latest month have fallen from 35% to 22%. The reason why the company has been stuck in such difficulty, as Peggy pointed out in the meeting, is primarily because its competitors might be using a revised costing system while Destin is still using the traditional one.