Zauner Ornaments -Costing and Pricing

Only available on StudyMode
  • Download(s) : 369
  • Published : March 6, 2010
Open Document
Text Preview
Zauner Ornaments
Costing & Pricing

Introduction
Zauner Ornaments was a large manufacturer of crystal and glass products based in Vienna Austria. The company had an international reputation of producing high quality glass and crystal at affordable prices due to the skill of its master artisan and using innovative technology in the manufacturing process. Its product was used in fine restaurants, hotels and residencies around the world. Due to slowing growth in the fine-crystal and glass-tableware markets, the organization has expanded into producing glass Christmas-tree ornaments to take advantage of its Crystal’s unique capabilities. The company leased a small manufacturing facility in Taiwan to produce small glass ball ornaments, large glass ball ornaments and specialty glass ball ornaments. Yu, a new finance controller discovered that that sales department has set the prices of products according to competitors. Even though the company was profitable overall, it was not known if the prices set were sufficient to ensure that the individual product lines were profitable. Chen, a senior analyst was tasked to perform an analysis of unit-product costs for each of Zauner’s three products. In the first analysis performed by Chen, the cost per box for each product was calculated using traditional volume-based costing system. Budgeted overhead was allocated to each product line based on the planned production of ornaments which resulted in small glass ornaments costing more that its selling price. In the second analysis, overhead was allocated to each product based on direct materials and direct labor that showed product costs less than current sales price. However, it was noted that both analysis were not based on the basis of the factors that caused the cost to be incurred unlike Activity based Costing (ABC) that traces overhead costs directly to products, processes, services or customers and helps managers to make the right decisions regarding product mix and pricing.

Q1: Determine the best base for allocating plant administration costs. Plant administration cost included supervision, labor relations and clerical costs. We have studied the data given in Exhibit 4 & 5 in a case study. We know that administration costs as indirect cost which one here is needed to allocate in each product line in proportion to resources used by each one. In Exhibit 4 trend of direct labor relates with increases in administration cost and second observation is each product line has different resource (labor) utilization based on ultimate finished product. All the three products were made on the same production line and specialty ornament products needed additional painting process. Hence labor parts in specialty product are comparatively higher than other two products. Data mentioned in exhibit 5 states that labor costs are increasing in small to specialty product. Considering all these reason we have allocated plant administration costs in proportion to direct labor costs.

Q: 2 calculate the ABC costs for each product on a per box basis. First step in any Activity Based Costing system is what activities are performed to manufacture three different types of the products i.e. Small glass ball ornaments, Large glass ball ornaments and Specialty glass ball ornaments. Overhead resources used by each product vary product to product and hence it is needed to allocate the actual cost in their respective product line. In a given case of Zauner Ornaments various activities and cost driver identified in following table for proper allocation of overhead cost.

Small glass ball ornamentLarge glass ball ornamentSpecialty glass ball ornament Numbers of ornament420000300000100000
Ornament per Box1261
Cost poolCost Driver
Production SchedulingNumbers of Batch800750500
Machine SetupNumbers of Batch80070500
Equipment DepreciationNumbers of Operation per ornament445 Plant DepreciationSquare Footage per box...
tracking img