John Deere Component Works (JDCW), subdivision of John Deere and Co. was in charged specifically of the manufacturing of tractor component parts. The demand for JDCW’s products had problems due to the collapse of farmland value and commodity prices. Numerous and constant failures in JDCW’s competition for bids, alerted top management to start questioning their current costing methods. As an outcome, the analysis has to be guided to research on the current costing methods with the intention of establishing legitimacy and to help the company in adopting a more appropriate costing system.
Q1. How did the competitive environment change for John Deere Company between the 1970 and 1980?
• Sales increased through 1982 but then started to decline.
• Deer adjusted its level of operations downward, cut costs where possible, increased emphasis on pushing decision making downward and restructured manufacturing processes.
• Deere took floor space out of production, reduced personnel by 38.5% (right-sizing), encouraged early retirements, and did not replace most of those who left.
• To improve their operations and to make a more efficient flow through production they separated three subdivisions: Hydraulics, Drive- Train Division, & Gear and Special Products division.
• The collapse of farmland values and commodity prices in the 1980's increased the competition.
• The high dollar reduced US Exports, therefore hurting both American farming and American Farming manufacturer producers.
Q2. What caused the existing cost system to fail in the 1980's? What are symptoms of Cost System Failure?
• The fact that John Deere had previously been using a Standa...
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...rice and also selling it to others at a price that just barely covers my direct costs. I wouldn’t like to assume that an accountant's allocation of costs into categories (e.g. overhead and direct costs) matches the categories that I’d want in order to make economic decisions.
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.
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