Gibson Insurance Company

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.

Thus my recommendation would be for him would involve the utilization of Activity Based Costing to allocate all indirect costs, direct costs, and overall manufacturing time into each and every product he is currently selling. His current method of splitting overhead between each line is inefficient and an incorrect picture of where all his resources are going. Going back to the Wrapped Tumblers example, Giberson would need to allocate more costs towards this product as its high levels of demand are utilizing more resources than he currently realizes. Realizing the true costing amounts of each product in this fashion will allow him to either drop inefficient products or increase/decrease the current prices of his products to match what he is truly spending on them. Given that his business is currently under distress, he also needs to focus on the effects of him completing his custom “made-to-order” products as they will bring in further revenue since manufacturing capacity is not at

Owens & Minor is a distributor of surgical and medical supplies to hospitals and other health care facilities. Due to changing demand from customers, the company is facing increased operating costs, which has resulted in lower profit margins and even losses. In 1993, O&M recorded an $18 million profit, which was reduced to a loss of $11 million in 1995. The entire industry is experiencing similar difficulties. In an effort to resume profitability, O&M is evaluating alternatives to “cost-plus pricing”. Cost-plus pricing does not reflect the true cost of the services provided by O&M. Customers are demanding more of O&M while

As we continue to move toward the end our quarterly objectives. I wanted to take the time to explain some of our costs. In our particular field of designing and manufacturing products, we are always engaging in ways that we can mitigate loss and improve our processes. Performing such changes will give a stronger presence in the market by allowing us to remain competitive.

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

Victoria Heavy Equipment’s most recent organization has been lacking effective communication practices amongst all of its divisions. The company has been suffering from lack of clear goals in measurable terms, for its divisions. The idea of each division functioning as an independent unit, whether it being cost or profit center, is a remarkable beginning. However, clear goals and key measurable need to be set for each center, which in our case have been overlooked. As a result, many of these centers have over spent, resulting in over expenditures, something we can definitely not afford with anticipated slower market.

The allocation of the New Product Development costs is also questionable. Even though these costs are being utilized to create new products, the established products are bearing the costs based on their profits.

1. What is the competitive situation faced by Wilkerson? The critical product in term of market competition is the pumps of Wilkerson Company. The pumps are Wilkersons major product line with a production of about 12,500 units per month. Pumps currently have the lowest gross margin among all products, because competitors had been reducing prices on pumps and Wilkerson adopted its prices in order to remain competitive and to maintain the volume. 2. Given some apparent problems with Wilkersons cost system, should executives abandon overhead assignment to products entirely by adopting a contribution margin approach in which manufacturing overhead is treated as a period expense? Our conclusion is, that they should not adopt

First, we have identified if there is really an insufficiency in the amount of selling prices set by the Sales Department, in reference to Exhibit 1 of the case. We did this through identifying the maximum amount of overhead costs that the company can incur for the three products and comparing it with the total overhead costs. See Table 1 for details.

Gibson Company is an insurance company that mainly sells annuities and life insurance. Gibson possesses two subsidiary companies, Midwest and Compton, which also sell the same products but with different prices and features. Both subsidiaries rely on Gibson provides administrative supports for maintaining. Gibson used to use an objective measure to calculate each policy as the support costs allocation basis. The original method did not reflect the real cost by support activities. Moreover, when the sales volume had increased, the profitability declined. The managers are considered the prices are set improper or costs are out of control. Management is looking for a better solution for solving pricing

with a number of strategic issues facing a capital-intensive, mature industry. Their product costing system was

This makes the company look good and they can afford to do this from good financial skills. Decisions like this make a good profit in the long run and all in all this is why it is so important to have a good management team.

1. Identify the flaws associated with the current method of assigning shipping and warehousing costs to Sharp’s products.

At present PC4U apportions its production overheads based on direct labour hours. With a range of products available and opportunity for customising these products individually to meet the retailer’s needs, this report aims to assess the effectiveness of this traditional method of allocating production overheads. It will discuss the drawbacks of the current approach used by PC4U, as well as an alternative approach in the Activity-Based Costing system, which “is intended to overcome the weakness of the traditional method by having various pools of costs and then allocating each pool’s costs on the basis of its root cause.”(Averkamp 2007) As well as comparing the benefits and drawbacks of these costing systems to determine what recommendations should be given regarding the approach PC4U should adopt, the report shall also discuss the impact an activity based management system may have on the company.

Under the new cost system, two broad sources of costs were identified: manufacturing and SM&A. All costs within these categories were reclassified as either volume driven or order driven. Hence, four cost pools were set up.