Strategic Cost Management

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.

“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.

Wilkerson employs a Normal Cost System, which means that they use predetermined overhead rates along with actual costs for direct material and direct labor. Normal costing systems are appropriate when overhead costs are a relatively small percentage of total manufacturing costs and product diversity is limited. For Wilkerson, normal costing does not make sense. Overhead costs make up over 50 percent of total manufacturing costs and their product offering is relatively more diverse. This indicates that the current accounting system in place may be distorting costs significantly. Supporting data:

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

The Ilarion Manufacturing Company operates a job-order costing system and applies overhead cost to jobs on the basis of direct labor cost. Its predetermined overhead rate was based on a cost formula that estimated $117,000 of manufacturing overhead for an estimated allocation base of $90,000 direct labor dollars. The company has provided the following data in the form of an Excel worksheet:

Management has decided that the suggested retail price for the 8-ounce can to the consumer will be $1.00. The only unit variable costs for the product are $0.36 for materials and $0.12 for labor. The

1. The official overhead allocation rate used in the 1987 model year strategy study at the Automotive Component and Fabrication Plant (ACF) was 435% of direct

Overhead is charged to production at 70% of the direct materials cost. Jobs 475, 477, and 478 have been delivered to the customer.

In order for a business to make sensible decisions concerning their products they market, they have to ensure they price their products correct (Cooper & Kaplan,1988). Hence, in the case the cost of OS-367 increased under the ABC system while the cost of GS-157 decreased. This can be attributed to the fact that traditional costs allocation is computed by allocating average overhead rates among the business. The OS-367 system used less machine hours compared to the other products. Hence, under the traditional system of allocation of overhead a smaller amount of overhead was allocated to OS-367. Activity-based costs allocation identifies costs and creates cost centers to charge other costs for the company other than costs that are directly

a) Under traditional product costing, compute the total unit cost of each product. Prepare a simple comparative schedule of the

Compute the amount of under- or overallocated manufacturing overhead. Is the amount significant enough to warrant proration of overhead costs, or would it be permissible to write it off to cost of goods sold? Prepare the journal entry to dispose of the under- or overallocated overhead.

This cost system is more accurate since it gives us the cost of each component according to their consumption of machine hours, direct hours… Thus it makes it possible to see where changes can be operated.

product cost is $10.60 per unit. The addition of this new product decreases the sales expenses and fixed factory expenses of the company. The figures show that by doing this it will make the products we already make less expensive. This will be presented in Exhibit IV below.

Therefore, the direct materials and direct labor is $256,500, $1.71 per unit for the average job shop. At $1.71 per unit, Brunswick’s bid price will be much higher at $3.00, which increases the chance that the bid will be rejected.

Notice, when compared with Drury 's method of using the overhead rate as a percentage of direct materials cost, the version presented here gives a radically different result. Had we applied Drury 's method, the product receiving cost per unit would have been: