19-1 Bennett Body Company

Chavez, Michellee Marie B. Diokno, Renee Angela P. Guballa, Czarina Mae C. CASE 19-1: BENNETT BODY COMPANY 1. As Mr. Kern, what would you be prepared to say in response to Mr. Bennett’s memorandum? As a response to the email of Paul Bennett: In accumulating the cost of production, Job order costing is being used by our company, Bennett Body Company, whereas, Conely Corporation uses process costing. Bennett system incurs a higher cost of paperwork because of costing products on a per job order basis. Their products are based on customers specification, thus, products are unique from each other. In Conely’s, system costs of production is on a per department basis because of its standard design. In our present set-up, process costing seems to be inapplicable. There are cost differences that can be noted between actual and standard costs of Conely system, as follows:  Materials Price and Usage Differences;  Labor Rate Differences;  Labor Efficiency Difference;  Production Volume Difference Standard costs are developed from former year's experiences and accomplishments and some adjustments from each department's managers. If our product's sales volume is seasonal in nature, it would be better to have our overhead allocation rate change to monthly from annually. If not, we could stick to annual overhead rate for simplicity of computation. Bennett should maintain its job order costing since it concentrates on manufacturing customized trucks. Each model that they produce may not be applicable for future demands and they occasionally receive orders that require changes on previous models.

2. How, if at all, should Bennett modify its present system? In order for Bennett to improve its costing system, they may incorporate standard job costing in order for them to reduce the cost of paper works and recordkeeping. This will also enable the management to assess the performance of the company since they can have a comparison of the actual cost of production against the

standard cost that has been established. Standard job costing allows the incorporation of variances, and this would make a better measure for operation control, as the management may be able to make thorough investigation into the operation of the company. Besides that, the management could also prepare estimates of the production costs for the purpose of future planning. With the introduction and development of technology, the use of IT systems could somehow eliminate manual operations that have been used to keep record of the actual production costs. The use of IT system for costing can enhance the process of tracking records and enables the management to get statistics in a timely manner, resulting to better decision making and more effective and efficient operations. Bennett costing is based on absorption costing, whereas Conley system is based on variable costing. In the calculation of product cost, Bennett included the fixed overhead cost. With regard to the variable overhead costs, perhaps Bennett should consider external factors that may affect the overall overhead costs. Factors such as minimal standard wages might affect the efficiency variance. If the standard wages that is used not applicable to the current economic situation, the employees may not perform up to the maximum capacity, thus contribute to reducing the efficiency rate. With respect to the fixed overhead cost, factor such as the price of diesel, which is beyond the control of the company may also affect the budgeted fixed overhead. A sudden rise in price may increase the cost of operating the machines, thus resulting in higher variance in capacity.