The presentation of the material is in dollars only. Overhead is applied to products as a percent of direct labor dollar cost. Factory profit for each year is found by subtracting direct material, direct labor, and direct overhead costs from total sales. The overhead percentage is calculated at the same time budgeting and is applied as a single overhead pool throughout each model year. The consulting company used 435% of direct labor costs in 1987 for their study; the budgeted was actually 437% (OH/DL=107,954/24,682). A similar percentage applies in the following year (109890/25294=434.5%). However in the next two years, after the outsourcing of oil pans and mufflers was enacted, the allocation of overhead in...
... middle of paper ...
... doors and manifolds. Mufflers directly contributed $28,911 in 1987 and $30,975 in 1988 and oil pans contributed $36,997 and $39,566.
To improve the system at ACF, these numbers need to be considered. A product line should not be eliminated simply because it is not world-class; if it is still contributing, it is probably a positive product, assuming it is not hurting the image of the company significantly. It is difficult to determine exactly whether it is contributing because we do not know the fixed and variable portions of manufacturing overhead. Employee interviews coupled with regression analysis using data from multiple years, possibly without the outsourcing disruption, could help to effectively estimate these costs. It is always dangerous to make produce/outsourcing and other decisions based on allocated manufacturing overhead if it is not handled properly.
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