QUESTIONS Question1

Use the Overhead Cost Activity Analysis and other data on manufacturing costs to estimate product costs for valves, pumps, and flow controllers (Activity Based Costing).

The Company is producing 3 major products Valve, Pump and Flow Controller. Currently it is using traditional accounting system, Unit of product is charged for material cost, labor cost (standard time for labor times the labor pay rate $16 per hour) and overhead cost. OH cost assigned to production on basis of production run labor cost. A better way to do costing is to do Activity Based Costing with assigning costs to different transaction.

Activity Receiving Material Handling Maintenance Depreciation Packaging/shippi ng Engg Set up OH/Unit Direct Mat cost Direct Lab cost Cost/unit Actual Selling price Markup

Valve 600 6000 10500 94500 1800

Pump 3800 38000 17400 156600 13800

Flow contrioller 15600 156000 2100 18900 43800

20000 128 17.8 16 4 37.8 57.7 34.5

30000 640 20.8 20 8 48.8 81.2 39.9

50000 1290 71.9 22 6.4 100.3 97.7 -3.3

Previous markup

35

22

42

Based on this calculation, we can see that the markup of pumps is much higher than what was earlier calculated. Hence price of pumps can be reduced. However there is a need to increase the price of flow controllers

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

The subsequent table highlights only the most significant changes in overhead cost allocation. Material and labor cost were not affected by the costing method and have thus been neglected. Please refer the table given in answer 1, If we look at the ABC costing method stems mainly from allocating differently the engineering, packaging and shipping costs as well as the receiving and handling costs. This is due to the higher number of transactions necessary to produce the flow controllers. This aspect is ignored in the former method. For the R&D costs, the ABC method is also superior and closer to reality, meaning that the flow controllers are allocated a higher percentage of total costs.

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

Valves: There is little change in costs with ABC method. Profit margin is close to the target of 35%. Hence no need to revise prices

Pumps: Profit margin is recalculated as 40%. Hence prices can be lowered in to get to a margin of 35% to compete in the market

Flow controller: There is a loss for this product as per the new accounting method. Target price should be around $135 based on 35% margins.

Desin Brass should keep using ABC costing in future also to remain competitive in the market.

Question 4
How much higher or lower would the net income reported under the activitytransaction-based system be than the net income that will be reported under the present, more traditional system? Why?

valves ABC standard cost unit price profit margin(%) Targeted Profit Margin net income as per ABC earlier net income 37.7 57.78 34.64 35 15012 8.3 15165 0

pumps 48.8 81.26 39.86 35 40483 9.3 22675 0

flow controllers 100.3 97.07 -3.58 35 -13882.64 162280

Total Income($)

541085 540680

There is no major difference in the net income using standard cost and ABC method cost.