Problem Statement
In 1991, recessions marked the lowering of the market price near to or lower than product cost and it was increasingly difficult for Lehigh for selling at premium prices. Cost of production remaining the same with decline in the price and volume lead to lowering of profits. This meant that Lehigh was flush with inventories and cost. In an initial attempt to reduce the inventory cost the management decided to use the pull based marketing concept which proved to be a failure as it was difficult to eliminate the steps in production and changeover.
Later in 1992, the market recovered resulting in increased demand. But even with the increase in demand the company was not able to realize the profits. To overcome this situation
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ABC does not take into consideration how smoothly material flowed through the plant and product profitability should reflect this kind of difference in resource consumption.
Therefore, ABC method is not recommended.
Refer Appendix 1 for calculation of Activity Based Costing calculations based on Exhibit 4, 5 and 6.
3.Theory of Constraints:
TOC proposed a simple operational measure to carry out the decision-making process - Throughput. Generally it is calculated as sales less direct variable cost and more commonly as sales less material cost which is comparable to contribution margin. According to this method profits can be increased by maximizing throughput per unit of the constrained resource. As already mentioned, the rolling process (CRM) is the bottleneck of the plant. This approach considers that the efficient management of the constrained resource is the most important factor to increase profitability. According to this approach, high speeds and alloys were the products that showed higher “contribution margins”: $25.00 and $17.70 per minute of rolling machine (constrained resource)
The major issues facing the company comprises of there being multiple businesses with different demands. There are separate levels of performance and success as well as growth chances for each of the sector and the firm needs to tackle with issues in each of these divisions (Dube, J.P., 2004).
In the John Deere case, they were calling a lot of things overhead that weren't truly overhead (e.g. scrap, which is probably proportional to the amount produced). We discussed with my group how the internal transfer pricing arrangement probably encouraged the managers to think this way, since it awarded contracts on the basis of direct costs but, by the books, the actual transfer price was supposed to be the full price. In summary, the John Deere case was an exercise in thinking about how not to make pricing decisions.
Excellent growth up until the most recent year. Sales dropped from 1984 to1985. A new product introduced in 1986 is forecasted to boost sales.
...e cut back to the department caused an operations halt and lead to a 19 percent drop in profit and an 8 percent drop in stock. Gross stated, “Despite a recommended implementation time of 48 months, Hershey’s demanded a 30-month turnaround so that it could roll out the systems before Y2K. (Gross)” Since the schedule was so tight, Hershey’s team had to take dastardly shortcuts at critical times of the implementation (Gross). The system went live and because of the poor implementation orders was prevented (Gross). Gross state this cost Hershey $100 million worth of orders when the supplies was in stock. Gross goes over how Hershey failed to do testing at certain phases, due to their desire to implement the system fast. Hershey also tried to implement the season during its busiest time, resulting in more loses from their cutbacks and poor handling of the implementation.
A service firm performance is usually measured in terms of quality. Nevertheless, these performance measurements can also be measured in terms of time, flexibility and cost, and they can also be used by a manufacturing company. In order to analyze the measures, I will divide them to the three main parts of operations, input – process – output:
(2015). 4 Activity Based Cost Systems for Management. [Online] Academia.edu. Available at: http://www.academia.edu/3882382/4_Activity_Based_Cost_Systems_for_Management [Accessed 23 Jan. 2015].
The contained paper has been prepared with objectives of elaborating over the three different costing methods namely, Absorption/Full Costing, Variable/Marginal Costing, and Activity Based accounting. The first segment of the report seeks to define and illustrate the costing methods based on the personal understanding of the writer gained through the class room and the academic readings. Part two of the report takes a form of short essay, written critically to evaluate the application of standard costing and variance analysis to any size of business, and concludes with a verdict that whether or not standard costing and variance analysis is applicable to each business with consideration of its costs and benefits of the system.
Activity-based costing is used as a supplement of traditional cost accounting in a company to support manager in internal decision making. It focus on assigning the indirect cost to direct costs in order to get a more accurate cost on products. Activity-based costing uses several cost pools instead of one in traditional cost accounting. The system is easy to implement and it provides many benefits, it allows the company to respond to inefficiency by reallocating resources to more profitable activity from areas that absorb too many resources. It also allows the company to respond to manufacturing overhead cost and assumes a more accurate selling price on products in order to make more profits. Company that do not have internal expertise to conduct activity-based costing analysis may think to hire one or ask company that provides this kind of services for help.
First we will talk about activity based costing and we will start by giving the definition of it ; Activity based costing means refining the costing system by concentrating on individual activities as essential or primary cost object or tool . ABC system has a lot of benefits and we will discuss them now, ABC helps in understanding overhead much better and the percentage of prim cost and overhead is the same in both ABC and traditional system; but what gives advantage of ABC over traditional is by using ABC system it helps to know the detail of overhead so that it can identifies how is the activity to avoid.
"College Accounting Coach." Process Costing-Definitions And Features(Part1) « Process Costing « Cost Accounting «. Feb. 2007. Web
Cost allocation is the process of identifying, aggregating, and assigning of cost to various separate activities. There is no overly precise method of charging cost to objects, hence resulting to approximate methods being used to do so. Amongst the approximation basis used includes square footage, headcount, cost of assets employed, and electricity usage amongst others. The main aim of cost allocation is to spread cost in the fairest possible method and also to impact the behavior pattern of the cost.
A study has been conducted to find the reasoning behind the surprisingly abrupt success decrease. It shows that one of main contributing factor includes a new increase in competitors in the area, which may start to create a rivalry with the industry. Competitors can become a huge danger towards companies since this gives the customers more options when deciding which product to purchase. There have also been new entrants, who of which are creating new and different products that are now available to the customers. Customers are also being persuaded by the power of other companies. This is now becoming a very competitive market, which can have a great effect on the company’s success. Although this is just one factor that seems to be affecting sales, there seems to be more contr...
Of greater importance, job-order costing system needs to accumulate three types of information which include direct materials, direct labor, and overhead. These factors are highly important essentially because of the significant variations in the products produced. Hence, each product or batch has a job identification number and costs are accumulated by a job number. All the more, job-order costing systems requires detailed accounting information and thus the total cost of all jobs is accumulated in one work-in process inventory control account; details of the cost materials, labor, and overhead for each job are kept in subsidiary records called job-order cost sheets (Edmonds, Tsay, & Olds,
According to Slack et. al. (2001) the best mechanism for running a business is to match level of demand (goods, services that customers need) with supply of capacity (recourses, labor force that the business inputs in the production process). They also define capacity as “the maximum level of value –added activity over a period of time”. Thus three main factors come into force here – the capacity of resources and labor force, the process operation which itself leads to satisfying customers through matching demand. It is very important to plan and coordinate all 3 factors very effectively because a difference in capacity and performance easily affects: costs, revenues, working capital, flexibility, quality of goods, speed of response and others.
In addition, at the time, the economy was doing great, therefore, using the push system to stock pile inventory was acceptable. However, during the dot-com bust of the 2000’s, its sales and the demand for its products greatly decreased. Unfortunately, during this time, Cisco discovered that it possessed an abundance of inventory, and, wrote off more than $1 billion in inventory. Consequently, the company learned that acquiring inventory in anticipation of market demand, and not factoring in the human element of its business increased its risks of failure. Obviously, Cisco wanted to meet its customer’s demands, however, the problem was that it held more inventory than what the customers were demanding. Nevertheless, afterwards, it knew that it needed to adopt a new, more efficient approach to inventory. Therefore, Cisco had to reevaluate its supply chain system and seek input from IT, customers, suppliers, and finance. Further, by including input from these sources, Cisco adopted the more efficient pull system. The pull system, is dependent upon producing smaller repeating orders. Rather than the push system, which relies on larger less repeating orders. Effective inventory management, when administered correctly, can reduce and keep the inventory to a more desired level. In addition, Cisco discovered that inventory management can reduce inventory levels, enhance cash flow and reduce overall