PIM 812 Managerial Accounting: Case Study – John Deere Overhead Allocation/Costing
John Deere Component Works A
How did the competitive environment change for JDCW between the 1970s and 1980s?
After three decades of massive growth in products, volumes, manufacturing and footprint, John Deere faced a rapidly changing environment. The 70’s were a time of diversification and expansion with a primary strategy of manufacturing all components internally. This growth and critical mass allowed for a simple costing system to be developed over time. This system worked ok for their needs of the day, it appeared that it did not impede their ability to optimize manufacturing and efficiency. Entering the 80’s the world changed for Deere, farm land prices and agricultural commodity prices dropped significantly, in fact it was the worst and most sustained agricultural crisis since the great depression. This situation was exacerbated with a high US dollar impacting export sales. Sales and production was reduced dramatically, volumes cut more than in half. John Deere had to react to this market change with significant staffing cuts, massive reorganization and a survival mode.
What caused the existing cost system to fail in the 1980s? What are the symptoms of the cost system failure?
The original system was built when Deere was growing and only focused on supporting that growth through vertical integration, supplying all of their own components. The system itself originally only had two cost drivers for overhead allocation, direct labor and materials based overhead, both further broken out into direct (variable) and period (fixed). Later in 1984 they added machine hours to allocate overhead as they optimized their operations and many multi-machines per operator....
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