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A final report for case study of Tijuana Bronze Machine company.
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Tijuana Bronze Machining
Group Case Study
As time goes by, it becomes clear to me that our competitions are crazy. Pumps are a
major product in a big market for all of us, but with the prevailing price cutting mentality no one will be to sell pumps profitably as long as we all are forced to match each others’ lower prices. I guess we should be grateful that competitors don’t play the same foolish
game in valves and flow controllers. Even with the 12 ½% price increases, we don’t see any new competition in flow controllers.
-Herb Alpert, President
Members of Group 8.0
Elmahie Elshikh Elajab Elshikh MR08 1123
Haidar Habib Mustafa MR08 1124
Kaziwa Kader KhalidMR08 1142
Safnimarina Safian MR06 1029
TABLE OF CONTENTS
List of Figures
Figure 1.0: TBM revenue based on the products ................................................... 5
Figure 2.0: Percentage of conclusion derived from the case study .......................... 21
List of Tables
Table 1.0: TBM performance ............................................................................... 6
Table 2.0: TBM Product Profitability Analysis ........................................................ 7
Table 3.0: Product cost for valves, pumps and flow controller ................................. 8
Table 4.0: Contribution margin for valves, pumps and flow controller ....................... 9
Table 5.0: Revised product costs ....................................................................... 10
Table 6.0: Comparison between standard costs and revised standard cost of TBM ... 11
Table 7.0: Product cost based on ABC approach ................................................. 12
Table 8.0: Product Profitability under 3 products costing system ........................... 13
1.0 Introduction ............................................................................................ 2
Background ...................................................................................................... 3
2.0 Performance ............................................................................................ 5
Company’s Effort ............................................................................................... 7
Calculation Report Analysis
1.0 Product cost per unit ............................................................................ 8
2.0 Estimation of contribution margins for 3 products .................................... 9
3.0 Revised Product Costs ....................................................................... 10
4.0 Product Costs of 3 products based on ABC approach .............................. 12
5.0 Comparison of reported income between 2 methods .............................. 13
6.0 Comparison of product profitability under 3 costing system .................... 13
7.0 Using ABC to re-evaluate JIT purchasing policy for flow controller ........... 14
3.0 Identification of Problems ..................................................................... 16
4.0 Recommendations ................................................................................. 17
Managerial Accounting Group 8.0 | 1
Option 1: Drop Flow Controllers? ....................................................................... 17
Option 2: Or Raise Selling Price? ...................................................................... 18
Option 3: What about the pumps? ..................................................................... 18
Option 4: Reduction (Re-engineering) for Pumps? ....................................... 18
Option 5: How Are Valves Doing? ..................................................................... 19
5.0 Conclusion ............................................................................................. 20
References ................................................................................................... 22
Appendix ..................................................................................................... 23
The calculation part ........................................................................................ 24
Group Action Project ........................................................................................ 30
Managerial Accounting Group 8.0 | 2
1 Introduction Tijuana Bronze Machining is basic case Activity-Based Costing (ABC) and
Activity-Based Management (ABM). There is enough richness to the fact.
Situation to create non-trivial calculations is rich enough to support
good discussion on the managerial implications.
This case is designed to familiarize with
the behavioral and technical variables that can aid or impede successful ABC
implementation. In this case, the casting role of a
business consultant was used to synthesize the case study's key
"change management" insights into a report that could be shared with co-
workers in an intranet-based knowledge management system.
Implementing change in an organization
is about ninety percent (90%)
cultural and ten percent (10%) technical. This is because the
organization dynamics, politics, and search for a champion that go on are
the real issues that make or break the project. One of the reasons to be able to
implement ABC successfully was because the right people became
champions.
Managerial Accounting Group 8.0 | 3
Within weeks of forming the company, Paul and his shop crew were
manufacturing valves that met or exceeded the needed specifications.
Alpert negotiated a contract with one purification equipment manufacturer,
and revenues soon were earned. Tijuana Bronze Manufacturing is a
producer of valves, pumps, and flow
controllers. Alpert, who had a long record of administrative successes,
back in 1984, established it. He partnered with Les Paul, a high quality
bronze boat fittings manufacturer and Mary Ford, an accountant with
manufacturing experience.
Since tolerances for water purification are small, maintaining them required
great labor skill and expensive machine controls. From the start,
Alpert either met or exceeded customers’ specifications. Shortly
after, TBM created an engineering
department and designed new products knowing that the same
manufacturing skills used in creating machine valves could also be used in
manufacturing pumps and flow controllers, since the valves alone did
not utilize TBM’s full available capacity. The same equipment and labor were
used for all three-product lines and runs were scheduled to match
customer-shipping requirements to eliminate finished goods inventory.
Their raw materials suppliers also agreed to use just-in-time deliveries
and products were packed and shipped
as completed.
He formed a partnership with les Paul, locally famous for the high-
quality bronze boat fittings he manufactured for fleet along the
Southern California and Baja coast. Alpert had recently retired from the
United States Air Force, where he had a long record of administrative
successes. The two then selected Mary Ford, an accounting with
manufacturing experience, to join them.
Paul was quick to analyze the nature of problems other manufactures were
having with water purification valves. Since the tolerances needed were
small, maintaining them required
great labor skill and expensive machine controls.
Background Tijuana Bronze Machining (TBM) was
established by Alpert in 1984 when
he purchased a moribund commercial machine shop on the California coast
south of San Diego. He had sensed an opportunity in a conversation with
the president of a large manufacturer of water purification equipment who
was dissatisfied with the quality bronze valves available.
Managerial Accounting Group 8.0 | 4
Regarding their products, valves
composed 24% of the company’s revenues and were created from four
bronze components. Paul had designed the machines that held each
component while it was machined
automatically. Precise machining was too expensive to compete in a
nonspecialized valve market and all monthly production of nonspecialized
valve market took place in a single production run, right before it was
shipped to each customer upon completion. Paul felt competitors
could match quality, but none had tried to gain market share by cutting
price. Gross margins amounted to 35%.
Pumps made up 55% of the revenues and manufacturing processes
were similar to valves but a lot less
intricate. The pumps were sold through seven distributors and orders
were stable as long as TBM matched competitive prices. The company
scheduled five production runs each month. Prices were under pressure
since the market was large and specifications were less exact.
Because there was no design advantage, it had no choice but to
match lower prices or give up its market share. Margins had fallen from
a planned 35% to 22%. Lastly, flow controllers created
21% of revenues. More components
were needed for each finished unit, but less labor was required. The
product was added to the line because it helped fill excess machining
capacity. They are distributed in 22 shipments to distributors and
customers. There is almost no competition in this market and even
when prices were raised 12.5%,
there was no effect on demand. Management is discussing possible
changes in their operations: for example, how to allocate overhead to
products. They are unsure whether they should continue to use traditional
cost accounting or activity based costing. One choice would be to
forego the overhead cost allocation altogether and instead charge it off as
a period expense. For overhead costs
that could not be traced directly to product lines, the other choice was to
allocate on the basis of transactions. Both have their advantages and their
disadvantages and they needed to weigh out both.
They decided to experiment with estimates to see how the product costs
might be affected. They began with discussing transactions and efforts
related to each type of overhead cost. They then created an analysis
Managerial Accounting Group 8.0 | 5
Figure 1.0: TBM revenue based on the
products
Valves24%
Flow Controller
21%
Pumps55%
2 Performance To analyze the situation of Tijuana
Bronze Machining, the past performance was taken
consideration. The valves, pumps
and flow controller become their main products and contribute the
company’s revenue as follows.
The standard gross margin has been setup by 35%. From the standard
percentage, the valves have been maintained at the standard with
revenue of 24%. So this means that their expense for the machining made
is successful although the TBM’s valves are too expensive to compete in
the nonspecialized valves market. No competitors could match TBM’s quality
in valves as the result of none of the
competitors tried to gain the market share by cutting the price.
As for the pumps, although the manufacturing process is similar to
valves only with a little less precision, the prices to distributors had been
under considerable pressure. The gross margin for pumps had fallen below the
company’s planned gross margin by
22% with revenue of 55%. One of the reason lead to this down turn is that the
company had no design advantage in pumps. So in order to survive they had
to match the lower prices or give up its market share.
The flow controller had regulated the
rate and direction of the flow of liquids by 42% gross margin up away from the
standard gross margin setup with 21% of revenue. This product was added to
help fill the excess machining capacity. The company identified that this product
had a good market as the flow
controllers had almost no competition in the market compared to other two
products. With that performance the flow controller prices was raised by
12.5% with no apparent effect on demands. The details of the
performance are depicted in the table 1.0.
Managerial Accounting Group 8.0 | 6
Table 1.0: TBM performance
(Using standard gross margin as the benchmark)
Managerial Accounting Group 8.0 | 7
Table 2.0: TBM Product Profitability Analysis
Company’s Effort As an effort of Tijuana Bronze Machining (TBM) company based on
their performance, what they had done so far can be depicted in the
answers of each questions provided. To begin with the product profitability
analysis is created to identify the potential problems they are facing.
What the company has done to
capture the essence of global competitive advantage is they come
up with the product profitability
analysis.From the table a statement concerning the competition in
pumps versus flow controller a raised.
Managerial Accounting Group 8.0 | 8
The Overhead calculation are as follows:
Machine depreciation $ 270,000
Set up labor
$ 2,688
Receiving
$ 20,000
Materials Handling $ 200,000
Engineering
$ 100,000
Package Shipping $ 60,000
Maintenance $ 30,000
Total $ 682,688
Total run labor = 9725 hrs x $16
= $155,600
Overhead rate = $682,688
$155,600
= 4.387455013 or 439%
* Manufacturing overhead = 439% x direct labor
Direct labor = $16 LPH x run labor hours per unit
Calculation Report Analysis As an effort to solve the problems of Tijuana Bronze Machining facing, the
calculation answers were made to analyze the options.
1.0 Product Costs per unit for valves, pumps and flow controllers Based on Exhibit 2 information, the calculation or workflows of the calculation
derivation are shown below:
Valves Pumps Flow Controller
Materials $16.00 $20.00 $22.00
Direct Labor based on run labor 4.00 8.00 6.40
*Manufacturing overhead 17.56 35.12 28.10
Total Standard cost $37.56 $63.12 $56.50
Table 3.0: Product cost for valves, pumps and flow controller
Managerial Accounting Group 8.0 | 9
In Exhibit 2, the measurements are built based on the direct and indirect costs and
on assumptions about the production and sales activity. Each unit of the product is charged for material cost based on the prices that the company’s pay for
components, and for labor cost based on the standard run labor times priced at
$16 per hour. Based on the price of direct labor $16 labor per hour times with the labor hours per unit for each product, the manufacturing overhead costs for each
product can de derived by multiplying the overhead rate (439%) with direct labor cost. With that calculation it shows how the amount stated in Exhibit 1 derived. For
Valves the standard unit cost is $37.56, pumps %63.12 and flow controllers are $56.50.
2.0 Estimation of Contribution Margins for the three products
To estimate the contribution margins for the three products, the contribution
margin principle is used.
Contribution margin =Sales - Variable Cost
Taking the information from Mary Ford’s conversation, the product profitability will
be measured at the contribution margin level, which is price less all variable costs. While the situation, only the short run variable cost is direct material.
Valves Pumps Flow Controller
Revenue $57.78 $81.26 $97.07
Variable costs (Materials only) 16.00 20.00 22.00
Contribution Margin $41.78 $61.26 75.07
Table 4.0: Contribution margin for valves, pumps and flow controller
After calculate the contribution margin, the Flow controller shows the most
contribution margin with $75.07 compare to valves and pumps are $41.78 and $61.26 respectively.
But the amount of the contribution margin should not disregard the overhead cost as because the marginal customers that willing to pay marginal prices are based
on marginal costs. From the outset, they have succeeded in part because they insisted on trying to maintain the 35% gross margin including allocated
manufacturing overhead. So in order to try the modern view of the proper way to allocate the cost question 3 leads to the revised product costs mentioned by Mary
Ford.
Managerial Accounting Group 8.0 | 10
*Material Related Overhead
Receiving $20,000
Material Handling $200,000
Total $220,000
Overhead Allocation rate on Materials Cost = $220,000
$458,000
= 0.480 or 48%
So material overhead for the 3 products = 48% x Material Cost
3.0 Revised Product Costs
Based on the information in Exhibit 2, the revised product unit cost per “More
Modern View”
Valves Pumps Flow Controller
Materials $16.00 $20.00 $22.00
*Material Related Overhead 7.68 9.60 10.56
Setup Labor 0.02 0.05 0.48
Direct Labor 4.00 8.00 6.40
**Other Overhead 21.30 21.30 8.52
Revised Standard Cost $49.00 $58.95 $47.96
Table 5.0: Revised product costs
The significant of the calculation was first to identify the material related overhead
(the cost of receiving and handling material) and allocated that to each product
line based on the cost of material.
The related overhead for the material of valves, pumps and flow controller are
$7.68, $9.60 and $10.56 respectively.
To calculate the revised standard cost, the other overhead is derived by calculating the overhead allocation rate times the machine hours. This can be depicted in the
work flow below. To get the revised standard cost, the total up of materials, material related overhead, setup labor, direct labor and other overhead is sum up.
Managerial Accounting Group 8.0 | 11
**Other Overhead on Machine Hour Basis
Machines Depreciation $ 270,000
Engineering $ 100,000
Packing and Shipping
$ 60,000
Maintenance $ 30,000
Total $ 460,000
Overhead Allocation Rate= $460,000.00
10,800 hrs
= $42.59 machine per hour
To calculate other overhead = $42.59 x Machine Hours
Products Standard Cost Revised Standard
Cost
Valves $37.56 $49.00
Pumps $63.12 $58.95
Flow Controller $56.50 $47.96
Table 6.0: Comparison between standard costs
and revised standard cost of TBM
After the calculation, the revised standard cost for valves is $49.00, while pumps are $58.95 and Flow controller is $47.96.The comparison calculation is depicted in
the table 6.0 below. The result of this revision made sense to the reason why the competitors are chasing lower prices in the pump market. The revised standard
cost for pumps is more than $4.00 below the present standard and would show a gross margin percentage of 27% compared to the current 22%.
Managerial Accounting Group 8.0 | 12
Table 7.0: Product cost based on ABC approach
Valves Pumps Flow Controller Total
Materials 120,000 250,000 88,000 458,000
Labor 30,000 100,000 25,600 155,600
Overhead:
Setup Labor 128 640 1,920 2,688
Receiving 600 3,800 15,600 20,000
Material Handling 6,000 38,000 156,000 200,000
Packing & Shipping 2,400 13,800 43,800 60,000
Engineering 20,000 30,000 50,000 100,000
Maintenance 10,500 17,400 2,100 30,000
Machine Depreciation 93,750 156,250 20,000 270,000
Total Overhead 133,378 259,890 289,420 682,688
Total Cost 37.78 48.79 100.76 1,296,288
From table 7.0, it shows that using Activity Based Costing (ABC) the valves total cost is $37.78, while a pump is $48.79 and the flow controller is $100.76. Based
from the ABC approach the cost can identify the costs pools, or activity centers in the company and assigns the costs to products and services (cost drivers)
based on the number of transactions involve in the process of providing a product. It is to be viewed to maximize shareholder value and improve the
company’s performance.
With the costing based on activities some advantages for the company is
identified:
Accurately predict costs, profits and resource requirements associated with changes in production volumes, organizational structure and resource costs.
Easily identify the root causes of poor financial performance. Track costs of activities and work processes.
Equip managers with cost intelligence to drive improvements. Achieve better Positioning of products
From table 7.0 too, the company detect that the flow controller product cost
much more compared to the standard cost and the range of high or lower amount is calculated for the following month, when the quantities produced and
sold, activities and costs were all standard.
4.0 Product Cost of the 3 products based on ABC approach
Based on the Exhibit 2 and Exhibit 3 information, the product costs for valves,
pumps and flow controllers is calculated using the “ABC” approach (Activity Based Costing) as follows:
Managerial Accounting Group 8.0 | 13
5.0 Comparisons of Reported Income between the Two Methods
After made a comparison between the two systems, there will be no difference.
Each month reflects two different methods of assigning the same actual costs to the three products. The total results for the company will be identical.
6.0 Comparison of Product Profitability under Three Costing System
Valves Pumps Flow Controller
Actual Selling Price $57.78 $81.26 $97.07
Standard Cost 37.56 63.12 56.50
Gross Margin 20.22 18.14 40.57
Gross Margin % 35% 22% 42%
Revised Cost 49.00 58.95 47.96
Gross Margin 8.78 22.31 49.11
Gross Margin %
15%
27% 51%
ABC Cost
37.78
48.79
100.76
Gross Margin 20.00 32.47 -3.69
Gross Margin %
35%
40%
-4%
Table 8.0: Product Profitability under 3 products costing system
The total reported results are the same for the company under the three methods. The accounting allocations for individual product lines change the gross
margins significantly. Product line profitability changes most significantly for flow controllers under ABC, dropping from the highest gross margin product to a
loser. Given the "complexity" reflected in Exhibit 3 for flow controllers, the activity/transactions costing system bears out the higher proportion of costs.
Therefore it is "better" than other systems. Also, although there could be differences in some cost allocations such as engineering and maintenance, 100%
of the costs are allocated on a reasonable resource consumption basis using ABC.
Managerial Accounting Group 8.0 | 14
7.0 Using "ABC" to Re-evaluate JIT purchasing policy for flow controller
According to the case study, Flow Controllers require ten components for each of
ten runs per month for a total of 100 receipts and 200 material handling transactions under the JIT arrangement with suppliers.
The total cost of both receiving and material handling is $220,000 ($20,000
receiving and $200,000 material handling). Receiving and inbound handling is $140,000 of this total
($20,000 + 0.6 x $200,000)
Under a "just-in-case" or JIC practice where all components for a month's Flow Controller production will be purchased together, the total receiving and material
handling costs will be only $14,000 (1/10 the cost). Some assumptions will be necessary for calculating inventory storage and carrying cost charge. The total
cost of flow controller components purchased each month is $88,000. Assume uniform production during the month so that the average inventory cost is
$44,000 (50% x $88,000). Assume carry costs are 100% per year, including a capital charge for space, space costs (maintenance, etc.), handling costs (labor,
etc.), carrying costs (insurance, taxes, etc.), and cost of funds. Applying a monthly carrying cost rate of 8.5% (100% / 12 months), the monthly storage
and carrying cost is $3,740 (.085 x $44,000). With a lower overall carry cost
percentage, this number is even lower.
Looking back at the calculation the company found out that:
Just-in-Time Costs: $140,000 Just-in-Case Costs:
Receiving & material handling $14,000 Carrying cost~4,000 18,000
Net savings per month using "JIC" 122,000
If TBM can reduce the receiving and in-bound material handling costs, there is a potential net savings of almost $1.5 million per year ($122,000 for 12 months)
by using monthly purchasing, versus JIT.
If we assume the $140,000 total costs are fixed, then there are no savings. But,
if all costs are totally fixed, who cares about any allocation scheme anyway?
"JIC" for Flow Controller Purchasing?
This alone lowers cost by ~$30.5 per unit ($122,000 / 4,000 units) which yields a 28% gross margin at current prices! [(97-70) / 97 = 28%].
Managerial Accounting Group 8.0 | 15
There seems no good logic for buying ten times per month, given the high cost
of receiving and in-bound handling. The basic ABC idea that receiving cost is driven by number of receipts, without
regard to the number of items being handled was considered. This is because, for valves, one receipt is 7,500 items. For flow controllers, one
receipt is about 400 items. The question of what is the nature of the process such that one transaction of
7,500 items costs the same to process as one transaction of 400 items has been debatable.
Managerial Accounting Group 8.0 | 16
Valves
It seems the company has no problem with Valves, even though the expense
of price machining to make valves too expensive but the merit for TBM’s
company is that the competitors don’t use cutting price strategy for valves.
After allocating ABC it will be clear that the company doesn’t need to change
their strategy for valves.
Pumps
Pumps are a major product in a big market; there are many rivals for this
product competing in the market. Cutting price by the competitors forced
TBM to cut pumps selling price in the market, but in the same time the
expense for pumps is high. The profit
cannot be seen if the company cuts its selling price as much as the competitors
do. The company’s planned gross margin for pumps is 35% but the actual
gross margin had fallen to 22% way to far from the standard margin.
Flow controllers
Even though TBM has added Flow
controllers to use idle capacity, but the expenses for this product is very high it
is more obvious when we allocate ABC system. It ensures that the company
makes losses on selling Flow controllers.
3 Identification of Problems Referring to the company’s data and the
conversation, their expenditure is very
high and getting less profits. The company makes three products: Valves,
Pumps and Flow Controllers.
Managerial Accounting Group 8.0 | 17
4 Recommendations The recommendations that can be suggested to the management were stated by
looking at how well the company’s doing.
How are they doing?
Looking back at the Planned Sales (assume volumes have not changed) calculation:
Valves (7,500 x 12 x $58) = $ 5.2 million
Pumps (12,500 x 12 x $97) = 14.6 million Flow Controllers (4,000 x 12 x $87) = 4.2 million
$24 million
Actual annual sales were only about $22 million at current prices. By assuming the
profit plan at planned prices produced an adequate return on investment; the current situation is about 2 million of negative economic income.
They need to be earning about $2 million more profit per year, somehow!
OPTION 1: Drop Flow Controllers?
As for the first option suggested to the management team, they can adding flow
controllers to the product line (to use idle capacity?) or doubled the manufacturing complexity (4 or 5 components versus 10 components).
But one thing that they might have to consider is, is this a reasonable thing to do in the factory?
Reason
If flow controllers were dropped, how much short-run cost-savings could be
realized? This question cannot be answered by ABC, which is not based on a variable cost and fixed cost dichotomy. For example, one half the engineering
costs are subjectively assigned to flow controllers. But will $50,000 of engineering cost be avoided if flow controllers were dropped?
This does not change the conclusion that on a fully allocated basis, flow controllers have a negative gross margin, let alone providing any bottom line profit.
Managerial Accounting Group 8.0 | 18
OPTION 2: Or Raise Selling Price?
Given the "no-competition" market for flow controllers, perhaps the selling price
could be increased gradually, but who knows? Who are the customers? What do they want? How much will they pay?
Given the uncertainty expressed by management in this market, there seems to be little harm in this pricing strategy, assuming management wishes to keep the
product line after seeing the ABC results. But, one must note that the higher the selling price, the more likely TBM will see some competition and/or reduced
demand.
And, if the purchasing policy is changed per Question 7, there is really no major
problem at all with flow controller profitability.
OPTION 3: What about the pumps?
The selling price for flow controllers increased more than 12% this past month
while the selling price for pumps decreased more than 16%.
The ABC analysis indicates that pumps still have the highest gross margin (40%) at the actual selling price. The gross margin would be 35% at a price of $75.06,
which would allow still further price cuts of $6.20 per unit. Given by the commodity pricing pressure on pumps and if 35% is really TBM's
necessary gross margin before SG&A expenses to earn an adequate rate of return, then a further 5% decrease to approximately $75 can be made without
harming the target gross margin. This assumes the ABC costs per unit do not
change.
OPTION 4: Cost Reduction (Re-engineering) for Pumps?
There is a lot of buyer power in this market, so TBM must undertake cost
reduction and re-engineering programs to be the low cost producer. The case says pumps require less precision manufacturing than valves. Pumps involve
only one more component than valves. There are approximately 58 workers on board and average wage (plus benefits)
is $16 per hour. At 25% benefits, an approximate wage rate is $13 per hour, which is on the high side for industrial manufacturing jobs along the Mexican
border at the time of the case.
Perhaps less skilled machinists could be used on the pumps (and flow
controllers)? Although automation is touted by management, direct labor represents 12% of the total manufacturing costs. Again, some cost savings may
be possible. Also, eight hours for a set-up!
Managerial Accounting Group 8.0 | 19
OPTION 5: How Are Valves Doing?
Apparently, the one valve customer is pleased with their quality and competitive
price. Competitors are not attempting price cuts. The case implies that
automation and efficient production processes are helping control costs and efficiency. But is it good strategy for TBM to be dependent on a single customer
for valves?
The ABC gross margin is 35% for valves so no action seems necessary to raise or
lower prices.
A question for management: Is there no growth in this market? Evidently, the
company makes pumps and flow controllers to fill out the production capacity. Can we really continue long-run with 24% of sales in a no-growth market with a
single customer? And all of these options of recommendations can lead to the conclusion.
Managerial Accounting Group 8.0 | 20
Based on the recommendations provided to the management team, the
ABC concept can be applied accordingly in certain situation. For option 1, they
should consider the impact of dropping the flow controllers, as the flow
controller are much related with the option 2 of raising the selling price. If
the purchasing policy is changed per Question 7, there is really no major
problem at all with flow controller
profitability.
While option 3 gives the company an opportunity to implement the ABC
concept as the ABC analysis indicates that pumps still have the highest gross
margin (40%) at the actual selling price. Then a decrease 5% in cannot
harm the target gross margin. This assumes the ABC costs per unit do not
change.
As for option 4, they should consider to do re-engineering or cost reduction to
the pumps. As per reasons mention in
the recommendation of option 4 they can not only save the cost of the setup
but also they can lure the buyer power in the market.
To go on for the option 5 on the valves, it is thinkable as the ABC gross margin
is 35% for valves so no action seems necessary to raise or lower prices.
This option strategy is on the growth of the market. Because evidently, the
company makes pumps and flow controllers to fill out the production
capacity.
5 Conclusion
The conclusion is that the idea of JIT is
always "good"- not when receiving and handling costs are as high as in this
case. While the concept of ABC is a
dynamic concept based on cost management, where areas ABC is a
static concept based on cost measurement.
Managerial Accounting Group 8.0 | 21
As a whole conclusion, this project work was on ABC calculation and the ABM managerial implications. it designed to augment managerial and cost accounting
study, while the case situation develops the ability to apply cost analysis to decision-making situations. Thoroughly tested and proven highly effective, the
cases provide challenging and fun problems that help build skills with managerial and cost accounting techniques. Based on real-life scenarios, the cases give the
opportunity to analyze the situation, decide which accounting concept is most appropriate, and apply the concept as the manager of a firm.
As a result here is the general conclusion on what the team gets in the end of
this case study:
Figure 2.0: Percentage of conclusion derived from the case study
Based on the case study, the team had found out most of the questions asked
revolving around the ABC approach calculation which is approximately 50% of the overall content of the case study. While another 30% revolved around on
how to determine the decision making by using the ABM concept and other 10% respectively were on how to analyze the data generally and the correlation of
team work to determine the solution for the case study.
50%
10%
30%
10% Calculation- ABC implication
Analysis of data
Decision making-ABM concept
Team work
22
REFERENCES
BOOKS
Drury, C. (2004). Management and Cost Accounting, 6th Edition. In C. Drury. Thomson.
Ray Garrison, R. G. (2008). Managerial Accounting, 12th edition. In R. G. Ray Garrison,
Managerial Accounting, 12th edition (p. 309). Boston: McGraw-Hill Higher Education.
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(2007). Retrieved from social publishing : http://www.scribd.com
(2009). Retrieved from valuebasedmanagement.net:
http://www.valuebasedmanagement.net/methods_abc.html
23
APPENDIX
Valves Pumps Flow Controller$16.00 $20.00 $22.00
4.00 8.00 6.4017.56 35.12 28.10
$37.56 $63.12 $56.50
The Overhead calculation are as follows:Machine depreciation 270,000$ Set up labor $ 2,688 Receiving 20,000$
$ 200,000 Engineering 100,000$
MaterialsDirect Labor based on run labor*Manufacturing overheadTotal Standard cost
Materials Handling
Managerial Accounting: Group Project
Activity Based Costing
Question 1Product Cost per Unit - Current System
$16 LPH x 168hrs
Engineering 100,000$ Package Shipping 60,000$
30,000$ 682,688$
Total run labor = 9725 hrs x $16
= $155,600
Overhead rate = $682,688$155,600
= 4.387455013 or 439%
439% x direct labor
Direct labor = $16 LPH x run labor hours per unit
* Manufacturing overhead =
MaintenanceTotal
$16 LPH x 168hrs
tbm_CASESTUDY
Valves Pumps Flow Controller$57.78 $81.26 $97.0716.00 20.00 22.00
$41.78 $61.26 75.07
Sales - Variable Cost
Valves $37.56 $49.00Pumps $63.12 $58.95Flow Controller $56.50 $47.96
Contribution margin =
Revised Standard Cost
Variable costs (Materials only)
Question 2Estimated Contribution Margin for the 3 products
Revenue
Contribution Margin
Products Standard Cost
Managerial Accounting: Group Project
Activity Based Costing
tbm_CASESTUDY
Valves Pumps Flow Controller$16.00 $20.00 $22.00
7.68 9.60 10.56Setup Labor 0.02 0.05 0.48Direct Labor 4.00 8.00 6.40
**Other Overhead 21.30 21.30 8.52Revised Standard Cost $49.00 $58.95 $47.96
Receiving $20,000Material Handling $200,000Total $220,000
$220,000$458,000
= 0.480 or 48%
So material overhead for the 3 products = 48% x Material Cost
**Other Overhead on Machine Hour Basis
*Material Related Overhead
Overhead Allocation rate on Materials Cost =
*Material Related Overhead
Managerial Accounting: Group Project
Activity Based Costing
Question 3Revised Product Unit Cost per "More Modern View"
Materials
270,000$ Engineering $ 100,000
60,000$ 30,000$
Total 460,000$
$460,000.0010,800 hrs
= $42.59 machine per hour
$42.59 x Machine Hours
Machines Depreciation
Packing and Shipping
To calculate other overhead =
Maintenance
Overhead Allocation Rate=
tbm_CASESTUDY
(a)
Activity Rate
(b)
Activity(a) x (b)
ABC Cost$16.00 7,500 120,000
$4.00 7,500 30,000
Overhead:
Setup Labor 0.02 128
Receiving 0.08 600
Material Handling 0.80 6,000
Packing & Shipping 0.32 2,400
Engineering 2.66 20,000
Maintenance 1.40 10,500
12.50 93,750
Total Overhead $17.78 133,378
Total Cost $37.78 283,378
(a)
Activity Rate
(b)
Activity(a) x (b)
ABC Cost$20.00 12,500 250,000
$8.00 12,500 100,000
Overhead:
Setup Labor 0.05 640
Receiving 0.30 3,800
Material Handling 3.04 38,000
Packing & Shipping 1.11 13,800
Engineering 2.40 30,000
Maintenance 1.39 17,400
12.50 156,250
Total Overhead $20.79 259,890
Total Cost $48.79 609,890
(a)
Activity Rate
(b)
Activity(a) x (b)
ABC Cost$22.00 4,000 88,000
$6.40 4,000 25,600
Overhead:
Setup Labor 0.48 1,920
Receiving 3.90 15,600
Material Handling 39.00 156,000
Packing & Shipping 10.95 43,800
Engineering 12.50 50,000
Maintenance 0.53 2,100
5 20,000
Total Overhead $72.36 289,420
Total Cost $100.76 403,020
Valves Pumps Flow Controller Total
120,000 250,000 88,000 458,000
Labor 30,000 100,000 25,600 155,600
Overhead:
Setup Labor 128 640 1,920 2,688
Receiving 600 3,800 15,600 20,000
Material Handling 6,000 38,000 156,000 200,000
Packing & Shipping 2,400 13,800 43,800 60,000
Engineering 20,000 30,000 50,000 100,000
Maintenance 10,500 17,400 2,100 30,000
93,750 156,250 20,000 270,000
Total Overhead 133,378 259,890 289,420 682,688
Total Cost 37.78 48.79 100.76 1,296,288
Materials
Machine Depreciation
Valves
Pumps
Materials
Labor
Flow Controller
Materials
Labor
Machine Depreciation
Machine Depreciation
Machine Depreciation
Managerial Accounting: Group Project
Activity Based Costing
Question 4
Products Costs Using Activity Based Costing
Materials
Labor
tbm_CASESTUDY.xlsx
Comparisons of Reported Income Between the Two Methods
There will be no difference. Each month reflects two different methods of assigning the same actual costs to the three products. The total results for the company will be identical.
Managerial Accounting: Group Project
Activity Based Costing
Question 5
tbm_CASESTUDY
$57.78 $81.26 $97.0737.56 63.12 56.5020.22 18.14 40.5735% 22% 42%
Revised Cost 49.00 58.95 47.96Gross Margin 8.78 22.31 49.11Gross Margin % 15% 27% 51%
ABC Cost 37.78 48.79 100.76Gross Margin 20.00 32.47 -3.69Gross Margin % 35% 40% -4%
System favor and reason why:
Standard CostGross MarginGross Margin %
The total reported results are the same for the company under the three methods. The accounting allocations forindividual product lines change the gross margins significantly. Product line profitability changes most significantly for flow controllers under ABC, dropping from the highest gross margin product to a loser. Given the "complexity" reflected in Exhibit 3 for flow controllers, the activity/transactions costing system bears out the higher proportion ofcosts.Therefore it is "better" than other systems. Also, although there could be differences in some cost allocationssuch as engineering and maintenance, 100% of the costs are allocated on a reasonable resource consumption basisusing ABC.
Actual Selling Price
Valves Pumps Flow Controller
Managerial Accounting: Group Project
Activity Based Costing
Question 6Comparison of Product Profitability Under Three product Costing System
tbm_CASESTUDY
GROUP ACTION PLANS
(Haidar; Elmahie; Kaziwa; Safni)
Managerial Accounting Group 8 | 30
No: MA_01 Objectives:
To understand the ABC and ABM concept To plan and recommending a new practice to better enhance the
previous norms of the organization- transition from traditional costing approach to modern costing approach
To present the strategic problems or opportunities identified in the organization which will give a direct impact on the goals of the unit organization.
Initiatives: Process of fulfilling the Managerial Accounting Group Project Paper requirement successfully.
Action Plans/Milestones Period Person responsible Output
1. The case study title
Tijuana Bronze Machining
Case study handed on 29/08/09 (Saturday)
All
Review and read the
case study Get the general idea
on what the case study discussed
2. Arrange a delegation
tasks and discuss the outlines.
First attempt
29/08/09-31/08/09 (Saturday-Monday)
All
(discuss in class and via online)
Rough Outlines for the
Case study (Refer to page 3)
3. Assigned the 2nd
meeting to report the first result.
4. Set up another meeting to report based on the tasks assigned.
5/09/09 or
6/09/09 (Saturday-
Sunday) [Yet to be
confirmed]
Expected ready by Friday on 4/09/09
Haidar
- Answer questions 1 and 2
- extra findings
Elmahie - Answer questions 3 and 4
- extra findings
Kaziwa - Answer questions 5 and 6
- extra findings
Safni - Group Action Plans - Answer questions 7 and 8
- extra findings
Group Action Plans Answers of questions
1 to 8 Extra findings data
GROUP ACTION PLANS
(Haidar; Elmahie; Kaziwa; Safni)
Managerial Accounting Group 8 | 31
5. Collection of data
Prepare the presentation
Findings from external sources (internet/books) to support
7/09/09 - 12/09/09 (Monday-Sunday)
Safni– Presentation
Templates and report wrap up
Elmahie – input all the data in slides
Haidar & Kaziwa- make sure the calculation answer presented in excel form
Tijuana Bronze
Machining Presentation slides
6. 3rd meeting discuss the
preparation of the report according to the tasks assigned.
13/09/009 (Sunday)
Time frame to do the report
(13/09-09 -26/09/09) Expected ready by 27/09/09
All
Tijuana Bronze
Machining Report
7. The compilation of the
final (the total page would be confirm later)
8. Appoint one presenter
27/09/09 (Sunday)
All
Final report Presenter Presentation slides
9. Recheck and correct Due till one day before
submitted date
Recheck with Prof and members of classmates- Are we in the right track?
11. Submit and present 25/10/09 (Sunday)
All Tijuana Bronze
Machining Case Study Complete
Barriers
Need to be concise and precise in developing the report Time to meet and discuss the project Need full understand the ABC concept and trivial challenge
calculation questions yang besar
GROUP ACTION PLANS
(Haidar; Elmahie; Kaziwa; Safni)
Managerial Accounting Group 8 | 32
OUTLINES FOR PRESENTATION & REPORT:
1. Company’s Background Description of the company history including:
o Business involved o The company’s performance (for benchmark)
2. Company’s Effort
What they have done to capture the essence of global competitive advantage
o The accounting calculation (questions given 1-7)
3. Identification of the current problems Dictation of what problems of managerial accounting practice
concerned List of the problems identified Problem to focus on- more or less on what they should done to solve
the problems o Traditional costing approach to Modern Costing approach o JIT policy o Product costing system
4. Suggestion Planning/ Recommendations/solutions towards the problems
The pros and cons of action project solutions. The impacts towards the company Supported analysis the recommendation- accounting for sustainability
5. Conclusion
The report would be more precise on the calculations and the reasons behind it (answering all the questions requirements)
Please feel free to add or delete as needed. Ideas on the outlines would be much appreciated. Kindly inform me what you think (agree or do not agree or want to change) about the dates provided on the table so that we can include
this group action plans in our report too.
THANKS and Happy Ramadhan