John Deere

Topics: Cost accounting, Costs Pages: 3 (629 words) Published: January 22, 2008

•Including machine hours and labor
•Simple system
•Good for times when there is not a lot of difference year to year and when volume is high because cost allocation are based on volume related overhead rates. •Tying maintenance to machine hours and labor

•Depreciation per machine hour

•Allocating machine set-ups per machine hours
•Allocates overhead not per product
•No useful with wide range of products and volumes
•No material usage variances were computed by QA
•Employee benefits per machine hours

The cause of the costing system's failure was its inability to differentiate how machine hours were allocated by product unit. Thus, you are unable to understand the true production costs. Further, budgeted overhead rates were computed based on last year's figures so this system was not useful when volume was changes and declining year to year.

The symptoms and evidence of this include the huge range of variation on quotes for many parts, the higher volume units that had higher costs per unit (it is counterintuitive for a plant to be the most cost effective on low-volume and low-value parts), that the standard costs exceeded vendor prices by 35% on average although process wise they are competitive, and the large dispersion from competitor quotes that range from 50-60% and 200-300% on others.

Product A103 Cost Analysis

Material cost per 100 parts$6.44
Dir. Material Overhead$0.02
Per. Material Overhead$0.08
Direct Labor Hours/1000.185
ACTS Hour/1000.31
Labor Rate$12.76
Machine Setup$4.20
Direct Machine Rate8.99
Period Machine Rate7.61

ABC MethodStandard Method

Labor Support OH$2.62Direct Labor OH$4.84
Machine Ops OH$5.15Machine Hours OH$8.54
Machine Setup OH$3.54Materials OH$0.62
Production Order OH$2.86Total Overhead$14.01
Materials Handling OH...
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