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Autotech_Manufacturing_Analysis[1] - Autotech Manufacturing...

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Autotech Manufacturing Analysis Autotech is a manufacturing company that is very reputable in what they do, which is partaking in the production of replacement parts for automobiles. Specializing in part 127 and 234, the company has had a successful business with ever so steady increasing profits. But over the past two years Autotech has faced very stiff competition and has started to show small losses over the past two years and has shown small losses at the end of the reporting period. Losses in mind, Autotech has set out to figure out what the best course of action is to take back the market share and keeping increasing profit. Costing Issues Currently AuAtotech is using a traditional based costing method and is allocating overhead based on direct labor hours. The issue with the current costing system is that the two parts, 127 and 234, are not similar in terms of costs needed to create the part. Part 234 requires much more time and effort to create. It is not only more difficult to make but also requires special tooling and setups. With the over-reliance on direct labor and other volume based allocation methods, Autotech is over costing part 127 and under costing part 234. As you can see in diagram 1 below, part 127 and part 234 are receiving the same amount of overhead. The traditional costing method is not doing Autotech any justice because it is resulting in cross subsidization, and the cost of complexity and variety are not reflected in the product cost of part 234. Current Allocation System (Traditional base on DLH): total total Part 127 Part 234 Part 127 Part 234 Selling Price/unit $31.86 $24.00 15,930,000 $2,400,000 DM and DL $8.53 $6.26 4,265,000 $626,000 Overhead: rate $25.65 $25.65 $25.65 $26 DLH/unit 0.5 0.225 250,000 $22,500 Overhead applied $12.83 $5.77 6,412,844 $577,156 Gross Profit $10.50 $11.97 5,252,156 $1,196,844
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ABC Costing Since part 234 and part 127 vary in terms of the complexity in their production and costs, implementing an activity based costing system is what is needed for Autotech. The activity based costing approach involves identifying the major activities that cause overhead costs to be incurred, grouping costs of activities into cost pools, identify measures of activities (the cost drivers, and relating costs to the products using the cost drivers. The benefits of activity based costing are that ABC is less likely than traditional costing to under-cost or over-cost products and that ABC may lead to improvements in cost control. That goes without saying the limitations
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