Secondary Case - “L “f f 5.3 : s» ‘ “V {5% w W w ....

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Unformatted text preview: “L “f f 5.3 : s» ‘ “V {5% w W w . 2% W J Bridgeton Industries Case Daniel Webb, Michael Newman, Kevin McGowan, Wendell Taylor, Luke Trahan ACC 359, Atiase, 9:30 Bridgeton Case —- Executive Summary Background In the decade prior to the 1987 model year, the Automotive Component & Fabrication Plant (ACF) of Bridgeton Industries experienced a series of economic setbacks that resulted in the loss of business to other company plants or outside competitors. Bridgeton hired a consulting firm to analyze the competitive position of its product lines and identify candidates for outsourcing (Class III). At the time of the study, the ACF used a single overhead cost pool driven by direct- ia‘oor dollars and an overhead allocation rate of 435% per direct—labor dollar. The muffler»- exhaust system and oil pan lines were outsourced in model year 1989. Even after successful attempts at improving production efficiency and reducing downtime, manifolds feil to Class III, {caving managers to decide Whether to keep or outsource the line. The decision requires ACF managers to consider the following issues: recent trends in overhead allocation rates; appropriate costing systems for non~routine decision-«making (Le. outsourcing); 1991 budget projections under each alternative; other strategic considerations such as qualitative factors and appropriate cost driver selection. Analysis by {We led to the following findings. ‘ Overhead Allocation Rates Skyrocket as Product Lines are Outsourced. Overhead allocation rates increased significantly between model years 1987 and 1989 when Bridgeton chose to outsource oil pans and muffler-exhaust systems. This increase in overhead aliocation rate was caused by a significant decrease in direct labor that was not proportional to variable overhead costs. In association with outsourcing two product lines, direct labor costs fell substantially more in proportion than overhead, causing the rate to jump from 434 percent in 1988 to 577 percent in 1989 (Exhibit 1). Absorption Costing Distorts Relevant Data for Non-Routine Decisions Some product costs reported under the ACE’s current absorptidn costing system are irrelevant to the decision process. The avoidable costs/die the relevant factors to a make~or»buy decision. The plant managers couid get a better grasp of the future costs that difiiar among alternatives by focusing on direct costing for internal reporting (Exhibit 3). However, the simplest way to calculate the difference in net income under two alternatives is to consider only the relevant costs because it highlights the avoidable costs of the alternatives. The ACF managers will see that net income decreases by $28,506 if manifolds are outsourced (Exhibit 4). Recommendation for Moke-or—Buy Decision The AP C should keep the manifold line in house. Plant managers would reach this conclusion with ease using the contribution margin approach inherent in direct costing. Factory profit would decrease in 1991 by 55 percent (or $28,506) if manifolds are outsourced (Exhibit 4). Other Strategic Suggestions to Improve Decision-Makfiifg The probable new emission standard requiring stai/lies‘éisteel exhaust manifolds would lead to an increase in both product demand and selling price. El. us, the AFC should keep manufacturing manifolds. In order to assign accurate overhead costs to products, the AFC managers should implement multiple overhead cost pools that have more appropriate cost drivers. Products with highly automated production processes will have higher fixed costs. Thus, a substantial decrease in direct labor dollars would have a distorting effect on overhead allocation because the fixed costs would remain even though the cost driver has decreased. To avoid these product costing errors with products with high fixed costs, AFC managers should assign a more appropriate cost driver to that pool, such as machine hours. This would more accurately reflect the true distribution of overhead among products and lead to more realistic product costs. EXHIBIT 1 TREND IN OVERHEAD ALLOCATION RATES, 1987-1990 Formulas DL dollars*OH Allocation Rate 3 Actual OH Actuai OH/DL dollars m Actual OH Allocation Rate Mode! Year 1987 107,954/24,682 = 437% Model Year 1988 /! 109,890/25,294 = 434% Model Year 1989 (products outsourced) 78,157/13,539 = 577% Model Year 1999 79,393/14,102 = 563% EXHlBlT 2 ABSORPTION COSTENG 1991 Bud et Alt. a MAKE Sales: Fuel Tanks 5 83,535 Manifolds 93,120 Doors 49,887 Muffler/Exhausts — Oil Pans — Total $ 226,542 Direct Material: Fuel Tanks $ 16,996 Manifolds 35,725 Doors 16,825 Muffler/ Exhausts — Oil Pans ~ Total (69,546) Direct Labor: * Fuel Tanks 5 4,599 ManEfolds 6,540 Doors 2,963 Muffler] Exhausts .. Oil Pans ‘ Total (14,102) Overhead by Account Number: ** 1000 - Variable S 5,679 1500 — Fixed 5,928 2000 - Variable 2,115 3000 — Variable 1,410 4000 — Fixed 7,433 5000 - Variable 20,274 8000 ~ Fixed, 3,744 9000 - Fixed 5,987 3.1000 — Variable 3.030 12000 — Variable 15,683 14000 ~ Fixed 8,110 Total (79,393) Factory Profit 5 63,501 *Percentage reduction in DL cost under (b) 46% (1~.46) : 54% **VOH(b) = VOH(a) x (Ll-.46) 1991 Budget, Alt. (b) 8 83,535 49,887 $ 16,996 16,825 $ 4,599 2,953 5 3,045 5,928 1,134 756 7,433 10,872 3,744 5,987 1,625 8,410 BUY 5 133,422 (33,821) (7,562) 8,110 (57,044) 5 34,995 Sales: Fuel Tanks Manifolds Doors Muffler/Exha usts Oil Pa n5 Total Less: Variable Costs Direct Material: Fuel Tanks Manifolds Doors Muffler/ Exhausts Oil Pans Total Direct Labor: Fuel Tanks Manifolds Doors Muffler/Ema usts Oil Pans Total Variable 0verhead* Contribution Margin Less: Fixed CostsM Factory Profit *All Varibie 0H Accounts “All Fixed OH Accounts EXHIBIT 3 DIRECT COSETNG 1991 Budget, Alt. (a) MAKE $ 33,535 93,120 49,337 $ 226,542 5 16,996 35,725 16,825 (59,546) $ 4,599 5,540 2,953 (14,102) (48,191) $ 94,703 (31,202) 5 63,501 1991 Budget. Alt. lb! 5 83,535 49,887 S 16,996 16,825 $ 4,599 2,963 BUY $ 133,422 (33,821) (7,552) (25,342) $ 66,197 (31,202) 5 34,995 EXHiBlT 4 AVOIDABLE COST 1991 Ait. (a) 1991 Alt. (b) Avoidable Costs (a—b) MAKE BUY Relevant Revenues (Costs): Sales S 226,542 S 133,422 5 93,120 DM (69,546) (33,821) 3 (35,725) Di. (14,102) (7,562) 5 (6,540) VOH (48,191) (25,842) $ (22,349) Total S 94,703 5 66,197 $ 28,506 ...
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This note was uploaded on 03/03/2011 for the course ACC 359 taught by Professor Atiase during the Spring '07 term at University of Texas.

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Secondary Case - “L “f f 5.3 : s» ‘ “V {5% w W w ....

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