The Collapse of Farmland Values and Commodity Prices in 1980's
The collapse of farmland values and commodity prices in the 1980s led
to the worst agriculture crisis since Great Depression, which
discourage farmers to buy new equipment, instead many of them willing
to resale the equipment they bought not long time ago to finance their
land, thus, greatly reduced the dominate market, moreover, the higher
dollar exchange rate in 1980s hurt the US exports, both in farmers,
which are the main customer of John Deere and farm equipment producer,
such as John Deere. Therefore, the competitive environment became more
challengeable for the John Deere Component Works (JDCW) between the
1970s and the 1980s.
2. What caused the system to fail in the 1980s? What are the symptoms
of cost system failure?
The system assigns overheads only based on “normal volume, which
usually are labor and materials. This lead to distortions cost in the
calculation of products cost, and many indirect and support cost,
which are not used by products in normal volumes base, are included.
Therefore, the system provided inaccurate information, as Sinclair
recalled: “we didn’t even know our costs.”
The symptoms are disaster. JDCW lose both Internal and External
market.
Decrease the gap b/t outside bid.
3. What promise does the ABC system hold? How might it overcome these
problems?
The ABC system divides the overheads resources by seven different
types instead of two: direct labor support, machine operation, set up
hours, production order activity and administrative overhead...
... middle of paper ...
...rs OH = 27.56 x .310 = 8.54
Materials Dollars OH = .097 x 6.44 = 0.62
Total Cost (per 100
parts)
$22.85
ABC METHOD
Total Cost = Direct Labor + Direct Materials + Overhead
Direct Labor = .185 x 12.76 = 2.36
Direct Materials = 6.44
Overhead:
Labor Support OH = 1.11 x .185 x 12.76 =
2.62
Machine Operation OH = (8.99 + 7.61) x .310 = 5.15
Machine Setup OH = (33.76 x 4.2 x 2) / 80 = 3.54
Production Order OH = (114.27 x 2) / 80 = 2.86
Materials Handling OH = (19.42 x 4) / 80 = 0.97
Parts Admin. = (487 x 1) / 80 = 6.09
General and Admin. = (.091 x 12.76 x.185) + 23.59 = 2.38
Total Cost (per 100
parts)
$32.83
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"More Companies Turn to ABC."Journal of Accountancy, July 1994, p. 14. 11. Ness, J.A. and T.G. Cucuzza. " Tapping the Full Potential of ABC."