Cost and Flow Controllers

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The Sippican Corporation Case Study (A) Management Summary Sippican Corporation - a supplier of valves, pumps, and flow controllers to manufacturers of water purification equipment – faced concerns due to the fact that its competitors have been reducing the price of pumps, which was a major product line. According to Sippican’s cost accounting system further decrease in the price of pumps would not be acceptable as because of the past price reductions the margin on pumps have already declined from the planned 35% to 5%. Detailed and alternative analysis of the costs – such as Activity Based Cost analysis – reveals alternatives for the management to decide on pricing, efficiency measures, and product development.

Sippican Corporation uses a simple cost accounting system for performance evaluation of the different products produced in order to be able to make future decision. Indications that it is not working properly are that even though the 3 products require different effort from overhead Sippican still assigns overhead costs at a flat rate across all products using a production-run direct labor cost allocation ratio assuming that there is a direct relationship between overhead and the output quantity based on this ratio. The disadvantage of it is that a huge amount of cost is determined based on a single driver. The case indicates that Sippican is extending its relations creating more complex and segmented orders for which the simple accounting system is too superficial.

Total manufacturing overhead of Sippican accounts for 35% of the sales revenue. The later detailed ABC analysis illustrates that significant differences arise in the cost to produce the different products. A more detailed cost analysis (vs. simple or contribution margin methods) provides a clear understanding of the costs and profitability of each product to support proper managements decisions or even avoid a financial/profitability crisis. Based on the above pros and cons Sippican should

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