Dastin Brass

Cost Activity Analysis

1. Use the Overhead Cost Activity Analysis in Exhibit 5 and other data on manufacturing costs to estimate product costs for values, pumps, and flow controllers.

Activity Analyze
Material Costs Valves Pumps Flow Controllers

Material cost/unit Units/Mounth Material Costs/Month From Exhibit 2

16 7500 120,000

20 12500 250,000

22 4000 88,000

Labor Costs
Production Runs/Month Setup Labor (Hours/Production Run) Run Labor (Hrs/Unit) Run Labor Cost/ Month Setup Costs/Unit

Valves

Pumps

Flow Controllers

1 8 0.25
0.25Hrs*7500Unit*16$ 8Hrs*1Run*16$

5 8 0.5
0.50Hrs*12500Unit*16$ 8Hrs*5Runs*16$

10 12 0.4
0.40Hrs*4000Unit*16$ 12Hrs*10Runs*16$

Setup Costs in 1month Run Labor Cost in 1 month

128 $ 30,000 $

640 $ 100,000 $

1920 $ 25,600 $

Exhibit 2 : 1 Labor Hour costs 16 $

Machine Usage Costs

Machine Usage Hrs/Unit Units/Month Machine Usage Cost/month

Valves 0.50 7500 0.5*7500*25$

Pumps 0.50 12500 0.5*12500*25$

Flow Controllers
0.20 4000 0.2*4000*25$

Machine Usage Costs in 1 month

93,750$

156,250$

20,000$

Machine Depreciation Cost : 25$ per hour of use

Manufacturing Overheads
Receiving Materials Handling Engineering Packing and Shipping Maintenance

Valves
600 6,000 20,000 1,800 10,500

Pumps
3,800 38,000 30,000 13,800 17,400

Flow Controllers
15,600 156,000 50,000 43,800 2,100

Total
20,000 200,000 100,000 59,400 30,000

Sum
Exhibits 2 & 5

38,900

103,000

267,500

410,000

Total Costs
Material Costs/Month Setup Costs in 1month

Valves

Pumps

Flow Controllers

120,000 128

250,000 640

88,000 1,920

Run Labor Cost in 1 month

Machine Usage Costs in 1 month Manufacturing Overheads

30,000
93,750 38,900 282,778 37.7

100,000
156,250 103,000 609,890 48.8

25,600
20,000 267,500 403,020 100.75

Total costs Per month Standard Unit Costs

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

Total Costs

Valves

Pumps

Flow Controllers

Unit Costs (Traditional)

Unit Costs (Revised) Standard Unit Costs (ABC Analyze)

37.56 49 37.7

63.12 58.95 48.8

56.5 47.96 100.75

Here we have over valued pumps in traditional method and flow controllers seems to be under valued. because the traditional method allocates overhead as a part of direct labor. so, flow controllers appear cheaper than they are because the overhead they create gets applied across the other two products (valves and pumps). Activity analysis reflects this providing pumps a lower unit cost because overhead that should have been allocated to flow controllers was not being allocated to pumps under this method. In the revised method, we have, valves appear over valued, pumps appear overvalued, and flow controllers appear very, very undervalued. Comparing with activity analysis. Because the revised method applies overhead rate based on material related overhead. We think controllers dont use that much more material than pumps, but they do use much more labor, this is not reflected in the revised standard unit costs Therefore, flow controllers appear much less expensive because overhead produced with the labor going into making flow controllers was being allocated to pumps and valves.

3. What are the strategic implications of your analysis? Could the production process for flow controllers be changed in such a way to allow Destin Brass Products to reduce the unit cost of flow controllers? How would the change in the lot size for flow controller production affect unit costs? Has Destin Brass Products adopted the most profitable distribution system in the flow controller market? What actions would you recommend to managers at Destin Brass Products Company?

Implications of ABC analysis indicate that the current production process for flow controllers might be changed to reduce the unit cost of flow controllers. If Destin Brass could reduce the production runs of flow controllers to a single run per month, They will success to reduce the standard unit cost.

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 costs were all at standard. How much higher or lower would the net income reported under the activitytransactionbased system be than the net income that will be reported under the present, more traditional system? Why? If the interest goes higher on the new cost accounting, the net income reported should not have any different under the each costing analyze systems. Because revenues minus all costs gives net income. SO each accounting system will not change revenues and the total costs. Our method is a mechanism for allocating the costs across the various product lines. So, the net income will be remains constant.

The End