A skilled producer of brass valves, pumps, and flow controllers is challenged by rival’s pricing strategies in pumps and higher than predictableprofits for flow controllers. Supervisorsare suspicious that cost accounting and cost distributions to different items may be responsible for this. Two volume-based designs are detailed and demonstrated.
Product Cost Calculations
Cost per unit
Comparison of Costing Methods
Unit cost (ABC costing)
Unit cost (Existing system)
Unit cost (revised)
1. Use the Overhead Cost Activity Analysis in Exhibit 5 and other data on manufacturing costs to estimate product costs for valves, pumps, and flow controllers.
2. Compare the estimated costs you calculate to existing standard unit costs (Exhibit 3) and the revised unit costs (Exhibit 4). What causes the different product costing methods to produce such different results?
3. What are the strategic implications of your analysis? Could the production process for flow controllers be changed in such a way to allow Destin Brass Products to reduce the unit cost of flow controllers? How would the change in the lot size for flow controller production affect unit costs? Has Destin Brass Products adopted the most profitable distribution system in the flow controller market? What actions would you recommend to managers at Destin Brass Products Company?
4. Assume that the interest in a new basis for cost accounting at Destin Brass Products remains high. In the following month, quantities produced and sold, activities, and costs were all at standard. How much higher or lower would the net income reported under the activity-transaction-based system be than the net income that will be reported under the present, more traditional system? Why?