destin Brass Case study Solution

Destin Brass Products

Authors: Philip Larson

Destin Brass Products – Philip Larson

1) Use the Overhead Cost Activity Analysis in Exhibit 5 and other data on manufacturing costs to estimate product costs for values, pumps, and flow controllers. Using the information in the case, I estimate the costs of valves, pumps, and flow controllers to be $39, $81 and $147 dollars respectively. This is based on the number of transactions that occur across various overhead components like receiving/material handling, packing/shipping, engineering, and maintenance.

2) Compare the estimated costs you calculate to existing standard costs (Exhibit 3) and the revised unit costs (Exhibit 4). What causes the different product costing methods to produce such different results?

Destin Brass Products – Philip Larson

The traditional method is different from the activity analysis method and causes pumps to be “more” expensive and flow controllers to be “less” expensive. This is because the traditional method allocates overhead as a percentage of direct labor. Therefore, it does not take into account the fact that most of the direct labor (receiving – 78%, handling – 78%, packing – 73%, etc.) go towards flow controllers. Therefore, flow controllers appear cheaper than they are because the overhead they create gets applied across the other two products (valves and pumps). By contrast, pumps only accounts for about 19% of the direct labor. Activity analysis reflects this providing pumps a lower unit cost because overhead that should have been allocated to flow controllers was not being allocated to pumps under this method. Under the revised method, by contrast, valves appear more expensive, pumps appear more expensive, and flow controllers appear much, much less expensive than under the activity analysis. This is because the revised method applies overhead at an absorption rate based on material related overhead. Since Flow controllers don’t use that much more material than pumps, but do use much more labor, this is not reflected in the revised standard unit costs. As a result, flow controllers appear much less expensive because overhead associated with the labor going into making flow controllers was being allocated to pumps and valves. This explains why pumps and valves appear more expensive under this revised method than under activity analysis.

3) What are the strategic implications of your analysis? Could the production process for flow controllers be changed in such a way to allow Destin Brass Products to reduce the unit cost of flow controllers? How would the change in the lot size for flow controller production affect unit costs? Has Destin Brass Products adopted the most profitable distribution system in the flow controller market? What actions would you recommend to managers at Destin Brass Products Company? The strategic implications of this analysis suggest that the current production process for flow controllers might be changed to reduce the unit cost of flow controllers. In particular, if Destin Brass could reduce the production runs of  flow controllers (and pumps) from 10 (and 5) to a single run per month, this would drastically reduce the standard unit cost.

Destin Brass Products – Philip Larson

Additionally, Destin should consider reducing the number of transactions for receiving and handling of the flow controllers from 100 . If they could design their plant such that flow controllers only needed 50% of those transactions (50) they could drastically reduce their receiving and handling costs further reducing the standard unit costs for flow controllers.

Destin Brass Products – Philip Larson

Moreover, Destin Brass currently makes 22 shipments of flow controllers to their distributors and customers. The case does not say how many customers of flow controllers Destin Brass has, but if they could reduce the number of shipments being made they could further improve the standard unit cost of flow controllers. 4) Assume that interest in a new basis for cost accounting at Destin Brass Products remains high. In the following month, quantities produced and sold, activities, and costs were all at standard. How much higher or lower would the net income reported under the activity‐transaction‐based system be than the net income that will be reported under the present, more traditional system? Why? Assuming that quantities produced, sold, activities and costs all stay the same in the next month, the net income reported should not be any different under the activity/transaction based system than under the traditional system. This is because net income constitutes revenues minus all costs. The new accounting system will clearly not change revenues. Furthermore, the new accounting system will not change the total costs. It will simply provide a better mechanism for allocating the costs across the various product lines. Therefore, the net income should remain the same.