Arctic Insulation is a company that uses scrap paper along with fiber to produce insulation material used in home attics. They have two sources of the paper used to produce insulation; bulk paper from scrap dealers, and buying paper from the public at nominal rates. The direct labor cost for processing the bulk paper is much higher at $3.84 per bale compared to $.60 per bale for the purchased bales. The price per pound of scrap paper varies significantly based on market conditions.
The unit cost per bale appears to be falling which would agree with the General Manager’s alternative cost report. It’s hard to accurately compare the costs of producing each bale if total costs aren’t taken into account. Basing the overhead costs on a
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The price would determine how big of a percentage impact a $.015 per pound premium on paper purchased from dealers would be over scrap paper purchased at loading docks. Using historical information for the spot prices of scrap paper, in the 1979 to 1980 timeframe, spot prices ranged from $20 to $60 per ton. The $.015 premium becomes more of an issue the cheaper paper is available for purchase at the loading dock. At a spot price of $20 per ton or $.01 per pound, the $.015 per pound premium is 150% of the spot price. At this level, management should be focusing on casual purchases at loading docks. At a spot price of $60 per ton or $.03 per pound, the $.015 premium is 50% of the spot price. Rationalizing the premium will depend on which method is used to compute the cost per bale. When using the original cost report formula, the purchased bales were still cheaper after adding the $.015 per pound premium at all spot prices between $20 and $60 per ton. The prices for purchased bales ranged from $9.12 to $15.12 while the prices for formed bales ranged from $10.41 to $19.41. The purchased bales were more expensive at all spot prices between $20 and $60 per ton when computing costs using the formula proposed by the General Manager. Using the alternate cost report formula, total costs ranged from $10.63 to $16.63 per formed bale and $11.79 to $17.79 per purchased bale. Calculations can be found on the attached
Overhead costs need to be accounted for this way we can understand just how much cost goes into producing each unit. There are other cost factors that contribute to the product aside from labor and material. Since the projected and the actual sales volumes do not align Kelly should be concerned with the other
Overhead costs are not in proportion to the production output because of the method they are using. This leads to inaccurate pricing and costing decisions. An Activity Based Costing System would help find the real relationship between the products produced and overhead.
One of the major benefits of expansion is the reduction of fixed cost (fixed and selling). The cost is absorbed by 85,000 units instead of 80,000 units resulting in saving of $0.42 per unit.
Another concern identified, is the utilities expense budget for utilities in Year 9 which is $150,000. This amount is identified as a fixed amount and is unrelated to actually production activities and manufacturing efficiency. Considering that production levels and activity fluctuates throughout the year, the budget for utilities should be a variable item. An example; from Year 7 to Year 8, the utilities expenses increase by $15,000 and with this detection, ways to reduce this expense should be investigate. Another concern is a duplicated line item under the Selling, General, and Administrative Budget for Utilities and Utilities and Services. Another issue for concern, Total Variable Cost was reported to be lower; however was not enough for the lack of sales combined with an increase in advertising and transportation which resulted in an overall negative result. The low Net Sales directly impacted the Contribution Margin which decreased by $49,397. Overall, these concerns indicate the need for a flexible budget with variance analysis.
found out that despite this cost reduction in material cost, the costs of producing the low -end units for
Wilkerson employs a Normal Cost System, which means that they use predetermined overhead rates along with actual costs for direct material and direct labor. Normal costing systems are appropriate when overhead costs are a relatively small percentage of total manufacturing costs and product diversity is limited. For Wilkerson, normal costing does not make sense. Overhead costs make up over 50 percent of total manufacturing costs and their product offering is relatively more diverse. This indicates that the current accounting system in place may be distorting costs significantly. Supporting data:
In the case of Mendel Paper Company which produces four basic paper products lines at one of its plants: computer paper, napkins, place mats, and poster board. Although the plant superintendent, Marlene Herbert is pleases with increased sales he is also concerned about the costs. The superintendent is concerned with the high fixed cost of production, the increases in fixed overhead and even variable overhead. He feels that the production of place mat should be discontinued. His reason for the discontinuation is that the special printing is driving up the variable overhead to the point where the company may not find it profitable to continue with the line. After reviewing the future predictions of the
Hence, the standard cost per ton for variable costs, as of the beginning of the year, was $650 per ton ($21,450/33).
The top four expenses of Blackmores in the three years were the cost of raw materials and consumables used, employee benefits expense, selling and marketing expenses and promotional and other rebates. All the four expenses increased gradually in the three years. The cost of raw materials and consumables used raise from $ 65,748 to $ 76,551 while employee benefits expense increased from $ 48,179 to $ 54,910. The costs of selling and marketing expenses and promotional and other rebates increased to$ 24,462 and $ 32,478 respectively from both around $ 19,000.
Thompson Division tota Costs to Birch Paper = $288, being $400 made up of $280 for materials (linerboard and corrugating medium) and $120 for other costs. However because Thompson sources its materials from Southern division who make a $112 profit on materials, the total Cost to Birch Paper Company is materials $168 + other cost $120 = $288
The savings for the customer, however, comes from the savings in labor costs. Estimating a total of $714 labor costs/hour (Exhibit A), the approximate labor savings totals $5.08/foot driven (using Sanwal’s conservative estimates of 292,000,000 feet driven per year, page 5). Comparatively, CMI pads result in only $3.57/foot driven. On a job of 15,000 feet, the difference in value is $22,650 in saved labor costs alone. Consequently, a customer should be willing to pay $5.28/foot driven for the CMI Cushion Pads (see Figure 4). With this value-added, CMI can charge up to $2,837 for one pad, which would make the price exactly as much as the cheapest competitor (including labor costs). With that price, CMI would only have to sell 21,854 pads (which would service approximately 12% of the market, a feasible goal for CMI’s entrance) to make $62,000,000.00 (VP Joseph Fernandez’s approximate sales goal). The recommended CMI price, however, is $1986.34 (which is the value-capturing price of $2,837 with a 30% reduction). With an estimated 292,000,000-390,000,000 driven feet per year, the pile-driving
7. Though numbers given in the cost data can not be contested, I would definitely contest the way total cost has been computed. The item 345 department operates within a large manufacturing facility that churns out number of other products too. Hence judging the profitability of item 345 on the basis of total cost is not practical.
Synopsis and Objectives The owner of a midsize folding carton printer is considering the replacement of an old machine for cutting sheets of paper from rolls (a sheeter) with a new one. This standard capital budgeting analysis, which requires identification of both the relevant cash flows and the relevant discount rate, is enhanced by an alternative that is not explicitly stated but can be readily identified and analyzed—to outsource all sheeting and close down the sheeting operation. This alternative, which turns out to be financially optimal based on quantifiable case facts, forces students to consider strategic and other nonquantifiable
We will examine the given data from the case and compare the unit costs from the company’s current costing system (traditional costing) and from activity-based costing. We will also highlight other qualitative data in consideration with the numerical factors that may result to a significant change on our recommendation.
The above graph suggests that volume based computation of overhead costs does not reflect the real overhead costs based on actual production per product line (computed maximum in excess over actual). On the other hand, if we follow the allocation of overhead costs based on prime costs as illustrated in Exhibit 2 of the case, we need to consider other quantitative factors: 1. No data is available to determine the amount of raw materials used in producing each of the products. While we can assume that the production of small, colored glass ornaments uses fewer raw materials (e.g. glass) than large, colored glass ornaments, the amount of glass used to produce specialty ornaments cannot be derived from the facts of the case. 2. There is also no data available to determine the number of direct labor hours consumed for producing each product type, although evidently, specialty ornaments use more direct labor hours. Based on the above considerations, we deem it inaccurate to base overhead on prime costs, a common practice in traditional costing. In addition,