****PLEASE READ THE VALUES****
Jeri Cooper, the sales manager of Brunners Corporation, is getting worried. Her last three bids were rejected in favor of a bid from a new competitor to the market. Now, she is putting together a bid for a potential new customer, and she wants to make sure the price is competitive, but still profitable. As the managerial accountant at Brunners, your job is to help Jeri prepare bids by providing the most accurate cost estimates.
Brunners is a plastic injection custom molding company, which advertises its highly automated process as keeping costs low. Currently, Brunners uses a traditional (plantwide) costing system, with overhead costs allocated based on total direct labor hours. Suspecting that their traditional costing system is partially to blame for their recent problems, Brunners has begun the process of implementing ABC. However, before this new company entered the market, Brunners had little need to review their processes. Jeri has very little understanding of accounting, and has asked if her recent unsuccessful bids were due to an inaccurate costing system, or because process inefficiencies have driven up costs.
In the ABC implementation process, Brunners Corporation has identified four activities. The ‘molding’ activity is a highly automated process, where a few workers oversee several machines as they process parts. This is a large cost pool, as it includes the depreciation on the building all the plastic injection molding machines (i.e., millions of dollars of property, plant, and equipment). In the ‘materials management’ activity, workers with specialized machine training prepare each machine for a new process or color (setups) by cleaning and changing the molds in the machines, and then refill the machines with plastic pellets (materials handling) as needed. In the ‘trimming’ process, workers trim extra plastic from the parts. This extra plastic normally snaps off as the parts come out of the mold, but often needs to be trimmed as the molds get worn or if the mold is not correctly installed in the machine. Finally, in the ‘inspection’ activity, inspectors randomly select and inspect parts to ensure compliance with the customer’s specifications.
Having determined four activities used at Brunners, the ABC implementation team has separated the plant’s total overhead costs into the activity cost pools (see Table 1). The next step in the ABC implementation process it to identify cost drivers for each activity. So far, they have identified cost drivers for each of the activities (see Table 1). This is still a work in progress, though, and they are still making adjustments.
The proposed job is somewhat different, requiring pieces in a variety of colors (see Table 2 for details on the proposed job). Historically, customer jobs have required only one or two setups. While Brunners has not needed to support these types of requests in the past, several of the past bids (all rejected) have had similar needs. The plant manager believes that these types of jobs will increase in the future. Proving that they can support these requests would result in new business in future years.
You’ve realized that you could provide value to Brunners in a several different ways. First, providing cost estimates from both the traditional process and the proposed ABC method could shed some light on the accuracy of the cost estimation process. Second, you can use activity based management to identify improvements that could be made to the production process (if any). Finally, with your knowledge of this job (and the market looking forward), you could provide some valuable input to the ABC implementation team.
Table 1: ABC activities, cost drivers, and cost pools
Activity |
Activity cost driver |
Total activity cost pool |
Est. cost driver usage |
Molding |
Machine hours |
$420,000 |
300,000 |
Materials management |
Lbs of materials |
180,000 |
120,000 |
Trimming |
DLH (trimming) |
250,000 |
10,000 |
Inspection |
# of inspections |
100,000 |
2,000 |
Table 2: Job proposal (resources)
Direct materials |
$10,000 |
Direct labor (total cost) |
$8,000 |
Direct labor hours (molding) |
300 |
Direct labor hours (trimming) |
500 |
Lbs of material |
3,500 |
Number of setups |
6 |
Number of inspections |
15 |
Number of machine-hours |
1000 |
Required:
Write a 1-2 page memo, as the accountant of Brunners Corp, addressed to Jeri Cooper describing your analysis and the outcomes. Make sure you respond to the following items:
1. Provide a total cost estimate using the current traditional costing system, where overhead is allocated based on direct labor hours (Brunners expects to use a total of 40,000 direct labor hours this year).
2. Provide a total cost estimate using the activity based costing system proposed by the ABC implementation team.
3. Explain to Jeri which cost estimate would be more accurate, and why.
4. Use activity based management to respond to Jeri’s question about potential cost inefficiencies.
5. Evaluate the ABC system as it currently stands. Explain what change(s) you expect the ABC implementation team to make, and how that could affect your cost estimates.
Grading Rubric:
Item |
Points |
Traditional cost estimate: |
|
POHR calculation |
1 |
OH allocation |
1 |
Total cost estimate |
1 |
ABC cost estimate: |
|
Activity OHRs |
1 |
OH allocation |
1 |
Total cost estimate |
1 |
Analysis and ABMgmt |
|
Selection of cost estimate |
2 |
ABM recommendation(s) |
2 |
ABC evaluation |
2 |
OABC format |
2 |
Flow/legibility |
2 |
Appendix titles/formatting |
2 |
Grammar and proofreading |
2 |
Total Points |
20 |
****PLEASE READ THE VALUES**** Jeri Cooper, the sales manager of Brunners Corporation, is getting worried. Her...
Jeri Cooper, the sales manager of Brunners Corporation, is getting worried. Her last three bids were rejected in favor of a bid from a new competitor to the market. Now, she is putting together a bid for a potential new customer, and she wants to make sure the price is competitive, but still profitable. As the managerial accountant at Brunners, your job is to help Jeri prepare bids by providing the most accurate cost estimates. Brunners is a plastic injection...
Brunners Corp. Jeri Cooper, the sales manager of Brunners Corporation, is getting worried. Her last three bids were rejected in favor of a bid from a new competitor to the market. Now, she is putting together a bid for a potential new customer, and she wants to make sure the price is competitive, but still profitable. As the managerial accountant at Brunners, your job is to help Jeri prepare bids by providing the most accurate cost estimates. Brunners is a...
Jeri Cooper, the sales manager of Brunners Corporation, is getting worried. Her last three bids were rejected in favor of a bid from a new competitor to the market. Now, she is putting together a bid for a potential new customer, and she wants to make sure the price is competitive, but still profitable. As the managerial accountant at Brunners, your job is to help Jeri prepare bids by providing the most accurate cost estimates. Brunners is a plastic injection...
Hi-Tek Manufacturing, Inc., makes two types of industrial component parts—the B300 and the T500. An absorption costing income statement for the most recent period is shown: Hi-Tek Manufacturing Inc.Income StatementSales$1,708,000Cost of goods sold1,227,339Gross margin480,661Selling and administrative expenses620,000Net operating loss$(139,339) Hi-Tek produced and sold 60,200 units of B300 at a price of $20 per unit and 12,600 units of T500 at a price of $40 per unit. The company’s traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and...
Hi-Tek produced and sold 60,100 units of B300 at a price of $20 per unit and 12,700 units of T500 at a price of $39 per unit. The company’s traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below: B300 T500 Total Direct materials $ 400,900 $ 162,900 $ 563,800 Direct labor $ 120,800 $ 42,200 163,000...
Exercise 17-7 Departmental overhead rates LO P2 Textra Plastics produces parts for a variety of small machine manufacturers. Most products go through two operations, molding and trimming, before they are ready for packaging. Expected costs and activities for the molding department and for the trimming department for this year follow. (Round "OH rate and cost per unit" answers to 2 decimal places.) Direct labor hours Machine hours Overhead costs Molding 52,000 DLH 30,500 MM $732,000 Trimming 48,000 DLH 3,600 MH...
Textra Plastics produces parts for a variety of small machine manufacturers. Most products go through two operations, molding and trimming, before they are ready for packaging. Expected costs and activities for the molding department and for the trimming department for this year follow. (Round "OH rate and cost per unit" answers to 2 decimal places.) Direct labor hours Machine hours Overhead costs Molding Trimming 52,000 DLH 48,000 DLH 30,500 MH3 ,600 MH $ 732,000 $592,000 Data for two special-order parts...
Exercise 17-7 Departmental overhead rates LO P2 Textra Plastics produces parts for a variety of small machine manufacturers. Most products go through two operations, molding and trimming, before they are ready for packaging. Expected costs and activities for the molding department and for the trimming department for this year follow. (Round "OH rate and cost per unit" answers to 2 decimal places.) Direct labor hours Machine hours Overhead costs Molding 52,000 LH 30,500 $ 730,000 Trimming 48,000 DE 31600 MH...
Hi-Tek produced and sold 60,200 units of B300 at a price of $21 per unit and 12,800 units of T500 at a price of $40 per unit. The company's traditional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company's two product lines is shown below: B300 $ 400,100 $ 120,700 T500 $ 162,300 $ 42,890 Direct materials Direct labor Manufacturing overhead Cost of...
Textra Plastics produces parts for a variety of small machine manufacturers. Most products go through two operations, molding and trimming, before they are ready for packaging. Expected costs and activities for the molding department and for the trimming department for this year follow. (Round "OH rate and cost per unit" answers to 2 decimal places.) Direct labor hours Machine hours Overhead costs Molding Trimming 52,000 DLH 48,000 DLH 30,500 MH3 ,600 MH $768,000 $628,000 Data for two special-order parts to...