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Today
How are traditional cost systems
designed?
What are the limitations of traditional
cost systems when used for internal
decision-making purposes?
What is a death spiral?
Bridgeton Industries
Background
The ACF plant competes with other
Strategic Analysis
Bridgeton hired a consulting firm to
classify all plants products as:
Describe Bridgetons
existing cost system.
Utilization-based denominator
volume
The Problems
One heterogeneous plantwide
Reliance on a utilization-based
denominator volume
Disregard of selling & administrative
expenses
Should Bridgeton be
concerned about these
limitations?
Should Bridgeton Be
Concerned About These
Limitations?
Yes! Because:
Compute Bridgetons
Plantwide overhead rate for
1988.
$4,238 $75,196 =
Manifolds:
7.1%
$6,027 $84,776 =
Doors:
6.1%
$2,731 $45,174 =
Muffler/Exhausts:
8.7%
$5,766 $66,266 =
Oil Pans:
$6,532 $79,658 =
Compute Bridgetons
budgeted plantwide
overhead rate for 1989.
8000 (37.0%)
9000 (12.2%)
11000 (37.1%)
12000 (46.5%)
14000 (17.9%)
Handout
Utilization-Based Overhead
Rates
Plant A
June: ($120,000 + $500,000) 60,000 DLH =
$10.33/ DLH
July: ($100,000 + $500,000) 50,000 DLH =
$12/DLH
Plant B
June: ($160,000 + $600,000) 80,000 DLH =
$9.50/DLH
July: ($180,000 + $600,000) 90,000 DLH =
Product Costs
Plant A:
DM
DL
MOH
Total
June
$15
$10
$5.17
$30.17
July
$15
$10
Plant B:
DM
DL
MOH
Total
June
$15
$10
$4.75
$29.75
July
$15
$10
$6
$31
$4.34
$29.34
Capacity-Based Overhead
Rates
Plant A
June: ($200,000 + $500,000) 100,000 DLH =
$7.00/DLH
July: ($200,000 + $500,000) 100,000 DLH =
$7.00/DLH
Plant B
June: ($200,000 + $600,000) 100,000 DLH =
$8.00/DLH
July: ($200,000 + $600,000) 100,000 DLH =
Product Costs
Plant A:
DM
DL
MOH
Total
June
$15
$10
$3.50
$28.50
July
$15
$10
$3.50
$28.50
Plant B:
DM
DL
MOH
Total
June
$15
$10
$4.00
$29.00
July
$15
$10
$4.00
$29.00
July
Plant A:
Fixed portion of rate
$5.00
Unused capacity in DLH 40,000
Unused capacity cost
$5.00
50,000
$200,000 $250,00
0
Plant B:
Fixed portion of rate
$6.00
Unused capacity in DLH 20,000
$6.00
Questions We Answered
Today
How are traditional cost systems
designed?
What are the limitations of traditional
cost systems when used for internal
decision-making purposes?
What is a death spiral?