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
Actual costing is rarely used because managers can’t wait until the end of the year to obtain product costs. Information about product costs is needed as the year goes for planning, control, and decision making.
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
1. Describe Wilkerson’s competitive environment. At a minimum, include any barriers to entry, industry maturity, the specific market and production complexity for each product, and marketing concerns.
b. I do not think that the capital of Illinois plant should change its current cost system. The plant is also using the production-run direct labor cost to allocate its overhead costs. However, because the plant produces one product with no customization, with materials purchased from local manufacturers all made by hand (little overhead cost-Exhibit 2) this cost system is effective and should not be changed.
1. Assess the implementation of the time-driven ABC system at Kemps. What do you like about it? What are you less happy with, and would have done differently?
As we learned in chapter 7 initially,”… cost systems designs were simple…“(Brewster et.al, p. 236). The goal of the allocation process is to assign overhead in a manner that most appropriately reflects the cause /effect relationship of incurred costs. These cost systems were based on belief that there was a high correlation between direct labor hours and units produced (Brewster et. al, p. 237). ETO’s current cost system only factors in two of their cost components;” direct labor and burden” (Seligram, 1993 p.2 ) Burden is grouped into a single cost pool that includes costs associated with each of the testing rooms, engineering burden costs related to
Abby Conroy was tasked with calculating an effective quote for Breeland Ltd., she chose the activity based accounting costing system since it more accurately captures the related costs. A special order was placed by Breeland Ltd. with Ace Fertilizer Company. The did not plan to order more of this product in the future. Based on Ace’s policy, the special order included disposal costs for any used materials in the event no other orders existed for the unused materials at the time the Breeland contract was signed. Abby correctly calculated the total direct material and labor costs and accurately arrived at the indirect costs using the ABC method and used cost activity pools that make sense for the company and
with a number of strategic issues facing a capital-intensive, mature industry. Their product costing system was
The business is currently using a traditional or standard costing method which management are not confident in the product cost generated by the accounting system and are also using the current costing data extensively for other decision-making within the firm.
The purpose of this report is discussing the case of Wilkerson Company that confronting tough competition in price cutting in pumps which caused to a big drop of pre-tax operating income from 10% to 3%. After observing the existing costing allocation, we found out there is an issue on the existing costing report that the manager could not be able to see the real situation. In light of this, there will be brought to the discussion on the feasibility of using an alternative costing method – Activity based costing (ABC) in the latter paragraphs.
INTRODUCTION Businesses – from manufacturing, merchandising and service industries alike – take careful consideration in the analysis of their costing systems in order to be able to set up competitive prices in the market. Misallocation of costs may lead to incorrect price estimates, continuous production of unprofitable products, and ineffective processing schedules. In this case study, we will discuss the costing methods which Zauner Ornaments have used or is currently using and, in conclusion, be able to distinguish the advantages and disadvantages of each costing method. CASE CONTEXT The case seeks to assist Zauner’s comptroller, Yu Chia-yi, in determining the best costing method for their overhead costs. In addition we also aim to
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:
A respected food scientist at Fine Foods, Kay Smith, who also happens to be the manager of Strategic Marketing Unit Two, believes that there is inaccurate product costing in her unit. She has had education on process engineering but has little accounting knowledge. She feels that the method that Fine Foods is carrying out to calculate operating profit does not reflect the true performance of her SMU, and that the
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.
The company used the standard costing system and due the high complexity of the products, the product cost was inaccurate.