Case 2 : Destin Brass Products Co.

Question 1
Use the Overhead Cost Activity Analysis in Exhibit 5 and other data on manufacturing
costs to estimate product costs for valves, pumps and flow controllers.
Standard Unit Cost
Valves
Materials

@439%

Flow Controllers

$16.00

$20.00

$22.00

4.00

8.00

6.40

17.56

35.12

28.10

$37.56

$63.12

$56.50

Direct labor
Overhead

Pumps

of

direct labor $
Standard unit cost
Revised Unit Costs
Valves

Pumps

Flow Controllers

$16.00

$20.00

$22.00

7.68

9.60

10.56

Set-up labor

.02

.05

.48

Direct labor

4.00

8.00

6.40

21.30

21.30

8.52

$49.00

$58.95

$47.96

Material
Material overhead (48%)

Other overhead (machine

hour basis)
Revised standard cost

Activity-Transaction-Based Costs

Material
Direct labor
Total direct cost

Valves

Pumps

Flow Controller

$16.00

$20.00

$22.00

4.00

8.00

6.40

20..00

28.00

28.40

Total indirect cost

17.76

20.87

72.17

$37.76

$48.87

$100.57

allocated
Total cost per unit

*Workings
Activity

Machine depreciation
Set-up labor
Receiving

Total

budgeted Budgeted quantity Budgeted indirect

indirect cost

of cost allocation

cost rate

$270000

10800 hours

$25 per hour

2688

168 hours

$16 per hour

129 transactions

$155.04

20000

per

transactions
Material handling

2000000

129 transactions

$1550.39

per

transactions
Engineering
Packing & shipping

1000000

20%/30%/50%

60000

30 transactions

$2000
transactions

Maintenance

30000

10800 hours

$2.78 hour

Valves
Total

Unit

Direct materials

$120000

$16.00

Direct labor

30000

Total direct cost

$150000

$20.00

$93750

$12.50

Direct cost

Overheads
Machine depreciation
Set-up labor

128

0.02

Receiving

620.16

0.08

6201.55

0.83

Materials handling
Engineering

20000

2.67

per

Packing and shipping

Maintenance

2000

0.27

10425

1.39

Total overheads

133124.71

17.76

Total cost

$283124.71

$37.76

Total

Unit

$250000

$20.00

100000

$8.00

$350000

$28.00

Machine depreciation

$156250

$12.50

Set-up labor

640

0.05

Receiving

3875.97

0.31

Materials handling

38759.70

3.10

Engineering

30000

2.40

Packing and shipping

14000

1.12

Maintenance

17375

1.39

Total overheads

$260900.67

$20.87

Total cost

$610900.67

$48.87

Total

Unit

Direct materials

$88000

$22.00

Direct labor

25600

6.40

Total direct cost

$113600

$28.40

$20000

$5

Pumps

Direct cost
Direct materials
Direct labor
Total direct cost
Overheads

Flow Controllers

Direct cost

Overheads
Machine depreciation

Set-up labor

1920

0.48

Receiving

15503.88

3.88

Materials handling

155038.80

38.76

Engineering

500000

12.50

Packing and shipping

44000

11.00

Maintenance

2200

0.55

Total overhead

288662.68

72.17

Total cost

402262.68

100.57

Question 2
Compare the estimated costs you calculate to existing standard unit costs (Exhibit 3)
and the revised unit costs (Exhibit 4). What causes the different product costing
methods to produce such different results?

PUMPS

$37.56

$63.12

$56.50

$49.00

$58.95

$47.96

(11.44)

4.17

8.54

STANDARD
UNIT COST
REVISED

FLOW

VALVES

UNIT

COST
VARIANCE

CONTROLLERS

Based on the table above, there is a difference in the unit cost. The difference is due
to the allocation of overhead of each activity. The calculation of unit cost is divided into
direct cost and indirect cost.

The direct cost for both costing methods contain material and direct labor but for
revised costing, they have an additional direct cost, which is the set-up cost taken from
the overhead cost.
As for the indirect cost, under the standard costing, allocation of total overhead cost
was assigned to the production on the basis of production-run labor cost. For every $1.00
of run, it will cause $4.39 of overhead to be allocated to the product which labor was
applied.

Under the revised costing, the overhead is being divided into material related
overhead and other overhead. The material related overhead includes the receiving and
materials handling cost which has a rate of 48% of material cost and the rest of the
overhead cost is allocated under other overhead. The total overhead under the other
overhead is then divided by the total machine hour, which has a rate of $42.59 per
machine hour.

Below is the summary of the allocation of overhead for each type of costing method.

COSTING

DIRECT

METHOD

COST

INDIRECT COST (OVERHEAD)

Machine depreciation

Material

Set-up labor

Direct labor

Receiving
Materials handling

STANDARD
UNIT COST

Engineering
Packaging and shipping
Maintenance

Total Labor run = 9,725 hours x $16

= $155,600

Overhead rate = 682,688/155,600

= 439%

Material related
Material

overhead

Direct labor
Set-up cost
REVISED

Other overhead
Machine depreciation
Engineering

Receiving
Materials handling

Packaging

and

shipping

UNIT COST
Overhead

absorption

Maintenance

rate
= $220,000/$458,000
= 48% (material cost

Overhead absorption rate

= $460,000/10,800hours
=$42.59/machine hour

basis)

Questions 3
What are the strategic implications of your analysis? What actions would you
recommend to the managers at Destin Brass Products Co?

Valves

Pumps

Flow Controllers

Standard unit cost

$37.56

$63.12

$56.50

Revised standard cost

$49.00

$58.95

$47.96

ABC Total cost per unit

$37.76

$48.87

$100.57

As per the above summary calculation, we believe that the activity based costing
system ABC is the best choice for the managers at Destin Brass Products Co in order that
they can solve their over costing problem of their pumps, which covered almost 55% of
the company's revenue, and to maintain their position as a competitive supplier in the
market.
By following the activity based costing system; the company would reduce the pump cost
by almost 30% in comparison to the standard cost and about 20% in comparison to the
revised cost. Although, the ABC system will raised the cost of the flow controllers to
$100.57 (+50%) but we believe that this increased will not affect the company since the
competition in this products is very low and this product is representing only 21% of the
total revenue. The valve price will not have a significant change by applying the ABC
system in comparison to the standard price.

Generally, the activity based costing is the best system for Destin Brass Products Co
to reinforce their position and standing as being competitive in their products pricing.

Question 4
Assume that interest in a new basis for cost accounting at Destin Brass Products
remains high. In the following month, quantities produced and sold, activities, and cost
were all at standard. How much higher or lower would the net income reported under
the activity-transaction-based system be than the net income that will be reported under
the present, more traditional system? Why?

Total production/sold

Valves

Pumps

Flow Controllers

7,500 units

12,500 units

4,000 units

Cost per unit:

Traditional

$37.56

$63.12

$56.50

Activity-transaction-based

37.76

48.87

100.57

Selling price (actual)

57.78

81.26

97.07

NET INCOME (TRADITIONAL)

Valves

Pumps

Flow
Controllers

Sales
Valves (7,500 unit x $57.78)

433,350

Pumps (12,500 unit x $81.26)

1,015,750

Flow Controllers (4,000 unit x $97.07)

388,280

Less : Cost of Goods Sold

Valves (7,500 unit x $37.56)

281,700

Pumps (12,500 unit x $63.12)

789,000

Flow Controllers (4,000 unit x $56.50)

Gross Profit/Net Income

226,000
151,650

TOTAL NET INCOME

Gross Margin

226,750

162,280

540,680
35%

22%

42%

NET INCOME (ACTIVITY-TRANSACTION-BASED)

Valves

Pumps

Flow
Controllers

Sales
Valves (7,500 unit x $57.78)
Pumps (12,500 unit x $81.26)
Flow Controllers (4,000 unit x $97.07)
Less : Cost of Goods Sold

433,350
1,015,750
388,280

Valves (7,500 unit x $37.76)

283,200

Pumps (12,500 unit x $48.87)

610,875

Flow Controllers (4,000 unit x $100.57)

Gross Profit/Net Income

402,280
150,150

TOTAL NET INCOME

on

the

above

(14,000)

541,025

Gross Margin

Based

404,875

35%

calculation,

the

40%

net

income

(4%)

reported

under

activity-transaction-based system is higher than traditional system by $345. This is due to

the difference of gross margin for pumps and flow controllers under the two systems. The
gross margin for valve is same under both systems while pumps and flow controllers is
18% higher and 46% lower than traditional system respectively. Even though flow
controllers gross margin is much lower under activity-transaction-based, but higher gross
margin and higher demand for pumps will generate more revenue to the company and
could cover loss make by flow controllers.