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Managerial Accounting: John Deere Component Works Essay

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Managerial Accounting: John Deere Component Works

John Deere Component Works (JDCW), subdivision of John Deere and Co. was in charged specifically of the manufacturing of tractor component parts. The demand for JDCW’s products had problems due to the collapse of farmland value and commodity prices. Numerous and constant failures in JDCW’s competition for bids, alerted top management to start questioning their current costing methods. As an outcome, the analysis has to be guided to research on the current costing methods with the intention of establishing legitimacy and to help the company in adopting a more appropriate costing system.

Q1. How did the competitive environment change for John Deere Company between the 1970 and 1980?
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• This cost method does not provide the best system for JDCW’s cost allocation. By using only three overhead rates the present system grossly undermines the true production costs since other activities of the production process are not acknowledged. • The system also fails to compute material usage variances, which only further discredits the accuracy of the accounting cost structure. For more accurate measure of material usage, the quality assurance department must include this variance calculation in its weekly report.

• A further weakness is that the accounting department issues reports that only indicate how each area operates, rather than evaluating the performance of each area, which would prevent a constriction in cost efficiency. These weaknesses prevent JDCW from accurately accessing its true costs.

Q3. How were the limitations of the existing cost system overcome by the ABC Cost System? What are the implications of the ABC system?

Essentially, with the current cost system, the managerial analysis is highly flawed due to a lack of crucial in-depth cost information, as indicated by: 1) JDCW already had three cost pools with appropriate cost drivers for each; 2) JDCW distinguished variable ("direct") and non-variable ("period") overhead; 3) JDCW did not fall in the trap of charging under-capacity utilization out to current production levels (i.e., they used "normal volume" in the denominators of their
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