1. Use the Overhead Cost Activity Analysis in Exhibit 5 and other data on manufacturing costs to estimate product cost for valves, pumps, and flow controllers.
Exhibit 1 shows the estimated product costs for vales ($37.70), pumps ($48.79), and flow controller ($100.76) using the information provided in the Destin Brass case study. Exhibit 1: Estimated Product Costs for Valves, Pumps, and Flow Controllers
2. Compare the estimated costs you calculate to existing standard unit cost (Exhibit 3) and the revised unit cost (Exhibit 4). What causes the different product costing methods to produce such different results? Exhibit 2 illustrates the unit costs for valves, pumps, and flow controllers using 3 different methods of calculation. All three costing methods give us different cost/unit for each product because each method allocates overhead costs differently. Standard costing allocates overhead as a percentage of direct labor, regardless of the percentage of overhead used for each product. The revised method, allocates overhead at an absorption rate based on material related overhead. ABC method identifies the cost of each activity and allocates overhead costs on a per item basis, taking into consideration the usage of each resource. Valves have the lowest cost/unit using all three methods. When it comes to pumps, the standard unit cost and revised unit cost both show pumps as having the highest cost/unit, followed by flow controllers. However, ABC shows flow controllers with the highest cost/unit followed by pumps. Exhibit 2: Comparison of Costs
3. What are the strategic implications of your analysis? What actions would you recommend to the managers at Destin Brass Products Co? Exhibit 3 shows that Destin Brass is losing money on flow controllers, with a gross margin of -4%, on valves, it is at its target gross margin of 35%, and with pumps has a high gross margin 40%. This might explain why the increase in prices on flow controllers has no impact...
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