AMAN ARORA FT ANKITA KALANI FT DEVANKSHI PRAKASHFT GAYATHRI NARAYNANFT VUBHUTHI RAIZADAFT Group No. 24- Sec C1
If the company drops this product there will be a loss of $ Profit with respect to 103 is equal to $ Profit without 103 is equal to -$ Direct labour Power31000 Material Supplies36000 Repairs10000 Corp insurance34900 Total expense All value are in $ Total expense Revenue due to product Total Savings Profit producing product Profit without producing product
Thus, reduction of price provides added profit of $ StandardActual Direct Labour Power0.021 Materials Supplies Repairs Comp Insurance (5% of DL) Variable Cost per unit The effect of reducing the price by computing the per unit value Cost at $4.9Cost at $4.5 Unit variable cost Price per unit Units to be sold Discount to be given Unit expense Total Expense Savings due to reducing Comparison of for both the cost and unit sold All value are in $
Product 101Product 102Product 103 Direct Labour Power Materials Supplies Repairs Comp Insurance (5% of direct labour) Total Expense Product 3 is the most profitable product. Product 101Product 102Product 103 Price Discount to be given Actual Price All value are in $
Fixed cost is classified based on the number of units that are sold. Depreciation cost was allocated based on category of product and the units produced under each category. Actual costs were lesser than the standard costs. A depreciation cost of $ which was added to total standard cost was crucial for turnaround The increase in sales contributed to the turnaround.
JOHN DEERE CASE
Weakness Machine hours are not based on units of product so faulty allocation of cost. System could not depict bidding for individual parts and its respective costing. Benefits of employee provided was based on machine hours. The large dispersion raises a question on the validity of standard cost system for determining cost of individual parts. As the volume of products change on yearly basis budget overhead cost are not reliabe as there are calculated on past records. Strengths Less computing effort required. Due to large volume of products it was satisfactory at aggregate level. With the increased usage of automated machines designed method of adopting ACTS (actual cycle time standard) rate was a good approach. System was evolved to take care of period overheads and product overheads. The strengths of the current costing system is its simplicity of allocations. The allocation of overhead is done on the basis of direct labor and direct machine hours.
What are the strengths and weaknesses of the suggested costing system (data on exhibit 10)? Strengths Tracking of costs is done so that it reduces variations in cost allocations. PLC costs can be inferred in a such a manner to improve probability. Drivers for activities can be analyzed for better decision making. Overhead cost can be allocated based on activities such as machine operations, production order activity, material handling, setup hours and general and administrative overheads. Weakness Its time consuming. There are some costs which can’t be traced down on the basis of activity. There is some modification required in the existing system.
Contingency situation arose because of the following: There was improper allocation of costs. Overhead allocation was also inappropriate. The identification of cost drivers was also faulty.
ABC Method : Total Cost = Direct Labor + Direct Materials + Overhead Direct Labor = * = Direct Materials= 6.44 Overhead: Labor Support Overhead = 1.11 * * = Machine Operation Overhead = ( ) * = 5.15 Machine SetUp Overhead = (33.76 * 4.2 * 2)/80 = 3.54 Production Order Overhead = ( * 2)/80 = 2.86 Materials Handling Overhead = * 4 = 0.97 Parts Administration = (487 * 1)/80 = 6.09 General and Administration = (0.091 * 12.76) * (0.187) = 2.14 Total Cost (per 100 parts) = $32.21
Overhead rates that is predicted is on the basis of previous years. Material Usage Variance is insignificant. Gross profit statement indicates company’s performance. By dropping Product 103 would not positively affect the company’s prospects in a market as other companies offerings are varied. As price changed from $4.90 to $4.50 and no economies of scale applied to Product 101. The full capacity is not utilized as units are sold at $4.90 when can sell units at $4.50. 3 overhead costs are considered. Gross profit statement indicates company’s performance.
Company that is considered : Air India. Inspite of account details showing cut cost company is in loss year by year basis. It would be better buying planes and not leasing them. As there is no fineness or clarification on the costs associated, company would struggle in doing dynamic pricing and competitors would business by declaring offers The fixed costs associated to the airline industry is high. So aircrafts for shorter trips and the trips that are not full loaded would not add to costs.