Model Solution to Peterson Pottery

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  • Topic: Cost, Costs, Cost overrun
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  • Published : September 26, 2011
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Model Solution to Petersen Pottery
Petersen Pottery is a manufacturer of ceramic toilets located in the United States which has been in operation since 1960. The demand for its products is increasing and the bank has required evidence of cost control before advancing the money needed for further expansion. Mr Petersen has attempted to employ standards and budgets unsuccessfully. Production Methodology:

For the production process, please see Appendix A. As you can see from Appendix A, the major raw materials are clay and glaze. Potters are used for the majority of direct labour and the products are fired in kilns or ovens. Industry background:

Macroeconomic analysis:
The construction of housing have increased dramatically during the period from 1972 to the present as you can see in Appendix B . Since each housing unit has to contain at least one bathroom, the growth in housing units means a growing demand for toilet fixtures. As you can see in Appendix C – there has been continuing growth in both the GDP and in personal expenditures showing that the economy is strengthening and more people will be able to buy housing units. This also supports the growth in demand for toilet fixtures. Although there was a small recession during the late 1980’s and early 1990’s, since then demand for housing has increased at a average of 3.3% every year ( SHOULD REFERENCE TO SOURCE). There have been few technology innovations in this business.

Microeconomic analysis:
Petersen Pottery currently has 70 competitors however this segment has grown to approximately 1,700 manufacturers in the United States and 1300 in China. There is much competition in this industry ( Quote reference and name some suppliers) and therefore downward pressure on price. Clay is a cheap commodity with many suppliers ( reference and name). BEGINNING OF ASSIGNMENT B REQUIREMENTS

Mr. Petersen must show he can effectively control and monitor his operating costs so that the bank will give him the money he needs for expansion. Strategy:
Petersen Pottery makes toilets in an industry where there are about 70 competitors. Petersen Pottery mass produces toilets and, although they produce high quality toilets, this company is primarily a cost leader making cost control very important. BEGINNING OF ASSIGNMENT C REQUIREMENTS

Alternatives and analysis:
Petersen Pottery has three alternatives:
Alternative 1: Status quo
Alternative 2: Revert to original management costing procedures Alternative 3: Change existing costing system
Each of these will be analyzed in turn.

Alternative 1: Status quo
Under this alternative, no changes will be made to the current costing system. The senior master potter supervising production will be held accountable for all variances. Advantages:
This system requires no risk or changes in existing methodology so incrementally it is cheap. It satisfies the bank manager’s requirement that Petersen show that it has systems in place for controlling its costs which may mean that the bank will continue advancing Petersen the money it needs for expansion purposes. Since Petersen is experiencing high demand for its product and this demand will continue through to 2003 except for a small recession in the late 1980’s ( see Appendix B) , the need to expand is very real. The current costing system is also consistent with Petersen’s strategy as a cost leader as it will help them lower their costs to meet the competition which will come in the future from the Pacific Rim countries – particularly China ( refer to appendices listing growth of competition which is not included in this write up but should be). Disadvantages:

Petersen currently relies on highly skilled labour (potters) to produce its toilets. Although management is considering replacing the potters with machinery, they have not taken that step yet and therefore cannot risk losing their workforce. The master potter...
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