Case study: on costing systems and cost control
Lorson Manufacturing Company
Case Study
Executive Summary
Lorson Manufacturing Company is actively seeking to implement tighter cost control measures in an industry that is largely governed by prices. The purpose of this report is to present and analyse a new costing system proposed by Mr. Jan Lorson for the valve department of the company, and compare it to the existing system, in order to judge whether to go forward with its implementation.
The analysis uses a number of examples to highlight the significant differences in costs between the two systems, and the impact that these variances have on the business.
It is concluded that the new system does provide a definite improvement over the existing one, based on the benefits perceived from its introduction versus the implementation costs envisaged. The benefits include more effective cost control and performance measurement, precise stock valuation and more accurate profitability analysis. This would result in better decision-making on issues related to key product markets, profit margins, product introductions and deletions, as well as cost reduction.
General advice is also provided as to the extent to which further breaking down of the department into a larger number of cost centres would be useful, and the reasons behind objections by members of staff to the new proposal.
Analysis of Existing Costing System
The current system uses a single average hourly charge to allocate labour and overhead costs to the valve department. This rate is being calculated on a monthly basis by dividing the sum of the accumulated labour charges and department overheads by the number of labour hours worked. Job costs are determined by multiplying this single rate by the time each job spends in the department. Data for the calculations are derived as follows:
*Total labour hours from timesheets. Labour hours are actually recorded separately for each of the 5 sections of the department on a monthly basis, and then added up to
Case Study
Executive Summary
Lorson Manufacturing Company is actively seeking to implement tighter cost control measures in an industry that is largely governed by prices. The purpose of this report is to present and analyse a new costing system proposed by Mr. Jan Lorson for the valve department of the company, and compare it to the existing system, in order to judge whether to go forward with its implementation.
The analysis uses a number of examples to highlight the significant differences in costs between the two systems, and the impact that these variances have on the business.
It is concluded that the new system does provide a definite improvement over the existing one, based on the benefits perceived from its introduction versus the implementation costs envisaged. The benefits include more effective cost control and performance measurement, precise stock valuation and more accurate profitability analysis. This would result in better decision-making on issues related to key product markets, profit margins, product introductions and deletions, as well as cost reduction.
General advice is also provided as to the extent to which further breaking down of the department into a larger number of cost centres would be useful, and the reasons behind objections by members of staff to the new proposal.
Analysis of Existing Costing System
The current system uses a single average hourly charge to allocate labour and overhead costs to the valve department. This rate is being calculated on a monthly basis by dividing the sum of the accumulated labour charges and department overheads by the number of labour hours worked. Job costs are determined by multiplying this single rate by the time each job spends in the department. Data for the calculations are derived as follows:
*Total labour hours from timesheets. Labour hours are actually recorded separately for each of the 5 sections of the department on a monthly basis, and then added up to