Question

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. Brunners expects to use a total of 75,000 direct labor hours this year. 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 cost accounting, and has asked if her recent unsuccessful bids were due to an inaccurate costing system, or if there are process inefficiencies that 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. The trimming process is also where parts that have been underfilled are thrown out, so this activity also includes the cost of wasted materials. 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	$580,000	300,000
Materials management	Lbs of materials	220,000	120,000
Trimming	DLH (trimming)	255,000	15,000
Inspection	# of inspections	100,000	2,000

Table 2: Job proposal (resources)

Direct materials	$7,400
Direct labor (total cost)	$11,600
Direct labor hours (in molding)	300
Direct labor hours (in trimming)	500
Lbs of material	3,500
Number of setups	6
Number of colors used	4
Number of inspections	15
Number of machine-hours	1000

Required:

1.   Use activity based management to respond to Jeri’s question about process inefficiencies driving up costs.

2.   Evaluate the ABC system as it currently stands. Explain what specific change(s) you expect the ABC implementation team to make, and how that could affect your cost estimates.

Answer 1

Burner noticed that tradition costing is major issue to lose Bidding Contract
Burner wants to introduced ABC system
As per ABC based costing method , derived multiple Activity level and Cost Pool
Activity	Activity Cost Driver	Total activity- Cost Pool$	Est Cost- Driver usgae	Cost Driver rate$/ unit
Molding	Machine Hrs	5,80,000	3,00,000	1.93	( Rate / Hrs
Material management	Lbs of material	2,20,000	1,20,000	1.83	( Rate / Lbs of Material
Trimming	DLH (Trimmings)	2,55,000	15,000	17.00	( Rate / DLH Trimming
Inspection	No of Inspection	1,00,000	2,000	50.00	( Rate / NO of Inspection
Total Overhead cost(a)		11,55,000
Under Tradition - DLHr-b		75,000
Rate $/ Hr(a/b)		15.40
Direct cost head wise- Traditional Basis		Amnt($)
Direct Materal		7,400
Direct Labour		11,600
Overhead cost($/Hr=15.40
Direct Labour Hr- In Mondling	300
Direct Labour Hr- In Trimming	500
Total Hr	800
Overhead cost =800 Hr *$15.40		12,320
Total cost under Tradition Method		31,320
Under ABC base costing system - using above cost driver rate used in Overhead allocation
Activity	Activity Cost Driver	Number-A	Cost Driver rate$/ unit-B	Amount ($)-(A*B)
Molding	Machine Hrs	1,000	1.93	1,933
Material management	Lbs of material	3,500	1.83	6,417
Trimming	DLH (Trimmings)	500	17.00	8,500
Inspection	No of Inspection	15	50.00	750
Total OVERHEAD cost under ABC				17,600
So final cost under ABC method		Amnt($)
Direct Materal		7,400
Direct Labour		11,600
Overhead ( as calculated above)		17,600
Total cost - under ABC		36,600
Cost under ABC is higher than Traditional method
But ABC method , cost allocate ( Overhead ) more accurately
and correct way based on each cost driver . Under Traditional
,method , overhead cost not allocated in each cost driver
basis . So Better to go with ABC base method to get CORRECT
picture of Costing system