Destin Brass Case Study
Sells 3 products, aim 35% gross margin
Valves 24% revenue, high cost, no competitors, gm maintained at 35% Pumps 55% revenue, under price pressure, GM fell to 22%
Flow controllers 21% revenue, no competition, price raised 12.5%, no effect on demand
Activity based costing
Using machine hours to calculate costs
Q1 use exhibit 5 & data on manufacturing costs to estimate product costs for valves, pumps, and flow controllers
Traditional costing (exhibit 3) based on labour cost (1 cost pool) Revised costing (exhibit 4) based on machine hours & materials used (2 cost pools) Activity based costing (exhibit 5) transactions across different areas (multiple cost pools)
The more cost pools based on, the more accurate the cost allocation.
Compare results to existing standard unit costs (exhibit 3) and the revised unit costs (exhibit 4)
What causes the different product costing methods to produce different results and which has the most accurate allocation method?
Q2a since the current cost estimates are inaccurate, why do managers start thinking about the accuracy of cost estimates? What other info do they use? Based on other info source, whats your price setting advice?
Use market price to price product
Abc is a better more accurate form of costing but does not lead to better pricing Comparing profit margins reveal gross margin aims are met for valves and pumps (35% & 40%) but not flow controllers (costs doubled so gross margin fell from 42% to -4%). Previously mentioned price of flow controllers were raised 12.5% with no change to demand; this is because they have been underpricing the product.
Changing costing system doesn’t change profits but improves accuracy of cost estimates in order to guide your pricing strategy better. Pricing strategy changes profits.
Q2b p3-4 controller discusses another way to allocate cost where overhead costs are not...