Bridgton Industries owns and operates an Automotive Component & Fabrication Plant (ACF). The valuation of the products produced by ACF is based on their respective degree of cost competitiveness. Products that have a cost equal to or lower than competitors’ manufacturing cost are considered to be of the greatest value to the company. ACF’s manufacturing costs include Direct Material, Direct Labor and the respective allocation of the plant’s collective overhead. The overhead and direct labor dollars for model years 1987 through 1990 is stated in Appendix A, as presented in the Harvard Business School 9-190-085 case study. For the 1987 model year, overhead was applied to the products as a percentage of direct labor cost for the production of the respective product. This overhead percentage was calculated “at budget time” and then applied throughout the 1987 production year.
2. TRENDS FOR MODEL YEARS
The overhead and direct labor data was used to calculate the actual applied overhead percentage rate for the years 1987 through 1990, refer to Appendix A. The following assumptions were made for calculating the applied overhead percentage rate for the respective model year and analyzing the trend:
• The same method that was used for calculating and allocating the overhead percentages in 1987 was used for the remaining model years. • Costs of materials and labor were recognized in the same period as the sales. • Since there were no major capital purchases for new equipment during the timeframe of the study we have assumed that there were no major improvements made to automation efficiency and as a result any changes to the reported costs for direct labor can be attributed to changes in production quantities. • No significant increase in production line workers; however there is a notable increase in the amount of non-production workers.
There were no major differences noted between model year 1987 and 1988. The same product lines were in operation for both years.
The 1989 model year saw a substantial increase in the costs associated with the production of the plant. It was noted that two of the plant’s product lines were outsourced in the 1989 model year. The outsourcing of these product lines resulted in the allocation the full amount of the overhead to a fewer number of products, thereby producing a substantial increase in the remaining product costs.
There were no major differences noted between model year 1989 and 1990, as a result of the plant operating under the same business structure for both years.
The overhead allocation rates for model years 1987 through 1990 were assigned per product as a factor of direct labor dollar. The trend associated with this allocation strategy is that there is an increase in per product costs for the remaining products produced in the plant following the outsourcing of a product line. The increase in cost is result of the increase in the overhead percentage rate applied to the products, as shown in Appendix A.
3. FLAWS OF CURRENT COST SYSTEM
The product costs consist of both a variable cost and a fixed (overhead) cost. The variable costs reported in this cost...