Essay on Sippican Corporation

In using the ABC system, Valves and Pumps are matching the company’s target of 35% of gross margin apart from Flow Controllers. With the use of TAC, the gross margin on pump sales is 19.5% that well below the company's target gross margin of 35%. This indicates that the current overhead cost allocation practice did not reflect the real costs incurred on the products. The lower actual gross profit obtained was mainly due to wrong cost allocation on the pump product.

“Auerbach Enterprises uses machine hours as the cost driver to assign overhead costs to the air conditioners. The company has used a company-wide predetermined overhead rate in past years, but the new controller, Bennie Leon, is considering the use of departmental overhead rates beginning with the next year. “(Schneider, 2012). One product is affected more than the other by use of departmental rates rather than companywide rate.

Under an ABC system, the allocation of costs to products is achieved through at least four analytical steps. Firstly, costs are grouped into activity levels. Secondly, cost drivers are

3.) The estimated product costs for valves, pumps, and flow controllers using ABC for overhead activities (primarily Ex. 1 & 4) and direct cost data from the Exhibits are:

If we compare the old job costing method with the Activity based costing method we can see in the table below that the activity base rate gives us a much more accurate insight in allocating the manufacturing overhead costs. In fact, the activity based overhead calculation shows us that the activity rates for Valves and Pumps are lower than the rates used in plantwide production rates, but the activity based rate for Flow Controllers is around 50% higher than the cost calculated in the job costing method. The reason for this difference in our opinion can be traced back to the high receiving and production control costs as well as packaging &

The above cost system was efficient during the 1980s because it split up overhead over three cost pools, adding an additional pool, which has machine hours as its cost driver. This proved efficient because “[w]ith increased usage of automated machines, direct labor run time no longer reflected the amount of processing being performed on parts, particularly when one operator was responsible for several machines.” Packet, pg. 7.

• This cost method does not provide the best system for JDCW’s cost allocation. By using only three overhead rates the present system grossly undermines the true production costs since other activities of the production process are not acknowledged.

It only uses one cost channel to allocate their indirect costs and its figures are by chance. On the other hand, MDE management should convert to an ABC system since the emphasis is on each activity of production rather than an average cost based on material and labor (“Advantages, Disadvantages of (ABC) System”).They will be able to meet the needs of MDE and benefit it to reach its growth potential. To the firm’s advantage applying ABC, applied costs will be based on specific results. Instead of random overhead costs. (Activity Based Costing vs Traditional Costing). Although traditional costing methods are easier and basic. It only uses one cost channel to allocate their indirect costs and its figures are by chance (“Advantages, Disadvantages of (ABC)

Additionally, unlike some of the other plants, Detroit has organized its machinery to resemble more of a batch production system as compared to the line production found in other plants and this decision ultimately impacts output and cost of production. Finally, the process of transferring products and employees between plants creates distortions in the allocation of costs between plants and, as a result, would contribute to inter-plant overhead variance.

profit. However, by using the ABC method to analyze and allocate "other operating costs" to each of the market segments the

At the start, ABC rejected that the use of the traditional, where the products exhaust resources, and came up with the idea that activities exhaust resources (Awasthi, 1994). Once products require those activities, costs are accordingly assigned. ABC is comprised of resources, cost objects, and

Cost volume – the ABC system works best with a large number of cost activities and continually running a cost analysis to maintain each activity. Therefore, for some small firms or firms with a few product lines will not benefit as well from the system.

A variable production rate also affects the quality of the process bringing additional costs and more energy consumptions. A faster production negatively affects the reliability of machines and increases the likelihood of producing defective items. At the beginning of the production cycle, the process is ‘in-control’ and produces items that conform to the quality requirements. However, at a certain moment, the process shifts to an 'out-of-control' state, and from that point on a percentage of the items produced, which depends on the production rate (Khouja and Mehrez, 1994), is defective and requires rework. Moreover, the ‘out-of-control’ state may in turn end in an ultimate breakdown requiring a corrective repairing intervention that probability is affected by the production rate (Groenevelt et al., 1992).

General Motors (GM) is one of the most renowned automakers in the world. GM is well-known for their streamlined assembly processes which saves money and time in the production of cars. A study was conducted at one of GM’s vehicle assembly plants as part of a research project to examine how the ABC model provides value. GM specifically focused on its potential to determine expected energy use in a plant for varying production schedules in order to evaluate Demand and Response offers.

In the traditional management system, the main emphasis is on the volumes allocated to overhead costs and overhead items. The main costing element under it is the Activity Bases Costing (ABC). ABC tries to utilize cost drivers in terms of both volume and nonvolume of activities and raw materials. Managers