Essay on Sippican Corporation

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Product Gross Margin Calculation vs. Product Contribution Margin Calculation
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 …show more content…

This method did not account for any specific cost arising from the complexity, diversity or other production related specifics of the product line. In contrary, the time-driven ABC approach does account for all the nuances of each product line. From the table can also be inferred that the practical capacity is not totally used since at the end there is a total of $28,288 of unused resources. Table 3 summarizes the capacity utilization of various resources.
Table 3: Capacity Utilization Rates

Note: For exact calculations please see the attached excel file.
The significant shift in cost and profitability of flow controllers can be mainly explained by the considerably higher engineering and setup expenses (machines and labor). The latter arises due to the higher component number (10) of the flow controllers (resulting in higher complexity) which leads to a higher number of production runs and, thus, raises the number of setup hours. The number of production runs is further increased by the on average small batch sizes (see Table 4).
Table 4: Average Batch Sizes for Production Runs and Shipments

Note: For exact calculations please see the attached excel file.
The time-driven ABC approach reveals that flow controllers use disproportionally higher amount of the company’s resources per unit (see Table 5). It can be derived from Table 5 that flow controllers have much higher

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