Destin Brass Products Problem: – The Company is producing 3 major products – Valve, Pump and Flow Controller. The Company is concerned about the price cutting of Pumps going on in the market every month. It is also surprised to see no change in sales of Flow Controller despite 12 ? % increases in prices. Current Scenario: – Currently it is using traditional accounting system, Unit of product is charged for material cost, labor cost (standard time for labor times the labor pay rate $16 per hour) and overhead cost.
OH cost assigned to production on basis of production run labor cost. Revised Method:- The better approach to allocate overhead cost is Activity Based Costing along with the cost related to those transactions. First identifying activities – such as receiving, handling material, packaging, engineering, maintenance. The transactions required for each activity needs to be considered since the transaction causes OH costs to incur. New calculation for per unit cost is as follows: – ActivityValvePumpFlow Controller
Receiving600380015600 Material Handing600038000156000 Packaging and Shipping18001380043800 Enginnering200003000050000 Maintenace10500174002100 Machine Depreciation9450015660018900 Set-up Cost1286401290 Total OH cost per unit17. 8037320. 819271. 9225 Direct Material Cost162022 Direct Labor Cost486. 4 Total Cost per unit37. 8037348. 8192100. 3225 Actual Selling Price57. 7881. 2697. 07 Mark up34. 5729839. 92222-3. 350674771 Previously calculated Mark up352242
According to new figures actual Mark-up of Pump (40%) is much higher than previously calculated (22%). Hence there is scope for reduction of prices of Pumps. Conversely mark up of Flow Controller (-3. 35%) is much lesser than previous one (42%). There is need to further increase prices of Flow Controller. Conclusion:- Company should further reduce prices of Pumps to meet the market competitions as margins are high. Also it is essential to increase the prices of Flow Controller to be profitable.