MEMORANDUM TO: Herbert Waters, Waters, President, Superior Manufacturing Company CC: Dr. DeWayne Searcy, Uniersity of Miami !"OM: #ric $ntmann, Corde% Coo&, 'os(ua 'ordan, Sam Matt(e), !abiano Praca, Sat(i&a "ama*i, and "au% +e%arde, +e%arde, Hurricane Consu%ting #ngineers D$T#: D$T#: 'anuary -t(, -/0 SU1'#CT: Cost $ccounting $ccounting System S ystem $na%ysis $na%ysis and "ecommendations
Hurricane Consu%ting #ngineers 2t(e $na%yst3 (as comp%eted an ana%ysis of t(e cost accounting syst system em uti% uti%i4 i4ed ed at Super Superio iorr Manu Manufa factu cturi ring ng Comp Company any and and subm submit itss t(e t(e findi findings ngs in t(is t(is Memorandum. S(ou%d you (ae any furt(er 5uestions p%ease do %et us &no).
Introduction T(e Superior Manufacturing Company manufactures t(ree industria% products: /-/, /-, and /-. Superior manufactures products based on a 6dedicated factory7 concept, meaning eac( product is produced in a separate )are(ouse )it( a dedicated direct %abor force )it( indirect %abor 6f%oating7 bet)een factories. T(ese factories a%so inc%ude ra) materia% storage, receiing, production8process faci%ities, finis(ed8product inentory, and s(ipping. $fter seera% poor management decisions primari%y by t(e o%d president, t(e organi4ation (ad suffered and caused a net %oss of 9;;,--- at t(e end of --<. Since t(en Waters, (as decided to reie) figures for t(e first8(a%f of --0 to ma&e better sense of )(at decisions de cisions to ma&e. Superior competes )it( a group of eig(t companies in t(e =e) #ng%and area, some of )(ic( are %arger and offer a greater range of products. #ac( company se%%s a simi%ar product and t(e %argest company, Samra, re%eases its se%%ing prices at t(e end of eac( year by )(ic( t(e sma%%er companies must matc( to remain competitie. T(is can (ae a damaging effect for t(e sma%%er companies because if prices )ere cut by Samra t(ey )ou%d (ae to matc( prices and subse5uent%y reduce t(eir profits. During --<, Superiors s(are of industry sa%es )as />, ;>, and /-> for product /-/, /- and /- respectie%y. 1y uti% uti%i4 i4in ing g a simp simp%e %e cost cost syst system em Super Superio iorr is ab%e ab%e to effi effici cien ent% t%y y trac& trac& t(e t(e cost cost of production for eac( product and use to a%ue inentories, prepare budges and ana%y4e present and future performance. Since eac( product is produced separate%y )it( its o)n group of dedicated )or&ers, accounting fo%%o)ed t(is met(od to easi%y trac& a%% direct and indirect costs 2t(e t)o
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categories of Superiors cost a%%ocation system. T(e fo%%o)ing are important points of Superiors cost system: /. Unit costs )ere e?pressed in terms of /-- pounds of finis(ed product cost. Per /--8 pound rent cost of eac( product @unit outputArespectie factory rent 2based on cubic space3 . Tota% cost @ !actory direct cost B a%%ocated indirect costs 2)(ic( inc%udes interest on %oans3 . Costs )ere assigned direct%y to eac( indiidua% product factory.
Drop or Keep Product 103? 1y ana%y4ing t(e year7s sa%es for --< and first (a%f of --0 for profit and %oss it s(o)s t(at product /- is operating at a %oss of in bot( statements 2. mi%%ion and / mi%%ion respectie%y3. $t a g%ance t(is cou%d seem t(at /- is draining resources and s(ou%d be dropped from production. 1ut by simp%e cost ana%ytics )e can determine t(e true a%ue of product /-. t s(ou%d be noted t(at t(ere are more met(ods to ana%y4e t(e cost data from Superiors accountants, but )e )i%% on%y discuss t(e tec(ni5ues described in c%ass. 1y computing a contribution margin of product /- )e can see a%ue in t(e product. T(e fo%%o)ing tab%e s(o)s t(e ariab%e costs, se%%ing price and ca%cu%ated contribution margin of product /-: Variable Costs Compensation Insurance Direct Labor Power Materials Supplies Repairs
0.46 6.97 0.31 4.91 0.36 0.10 13.11
Selling Price with discount
Contribution Margin
$ 27.03 $ 13.92
$s t(e tab%e s(o)s, superior produces a product )it( a contribution margin of 9/. )(ic( constitutes 0/.0> of t(e tota% se%%ing price. T(is indeed s(o)s t(e product (as potentia% to ma&e profit for t(e company. 1y producing more units, increasing sa%es t(e company cou%d
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brea&een and begin to ma&e a profitab%e product. f Superior dropped product /- t(is )ou%d bring as %oss to a%% t(e non8ariab%e and fi?ed costs, )ou%d cause a drop in sa%es, and )ou%d (ae to renegotiate t(e factory renta% agreement 2a %arge portion of reenue e?pense3 to offset t(is decision. n addition, dropping product /- )ou%d create a boom in e?cess capacity from )(ic( a %arge portion of )or&ers )ou%d (ae to be restructured or %aid off in order to remain profitab%e for product /-/ and /-. f direct %abor force )ere &ept and t(e current mar&et s(are remained rigid t(en prices )ou%d (ae to drop dramatica%%y to &eep sa%es up, furt(er reducing t(e contribution margin. Oera%% )e be%iee /- s(ou%d be continued into production and as sa%es gradua%%y increase in t(e %ong8term t(e product cou%d bring a%uab%e profit to t(e compan y.
Lower Price of Product 101? as of !anuar" 1# $00%& $s )e &no), t(e sa%es for t(e first (a%f of --0 )ere sti%% )ea&, Waters (as de%iberated on t(e future scenario of pricing for product /-/. $s t(is is a competitie mar&et, %arge%y dictated by Samras price setting, Superior (as to be carefu% on )(ere it p%aces it price point. Waters made t)o forecasts of t(e company sa%es of first semester --. T(e first one )as to maintain t(e origina% price of 9<.0 )(i%e t(e second one )as %o)ering t(e price to 9.0 as t(e competitors p%anned to do. Maintaining t(e preious price Waters forecasted to reac( E0-, --- units sa%es, )(i%e reducing t(e price as Samra (as p%anned to do, (e forecasted /,---,--- unit sa%es. T(e fo%%o)ing is a tab%e producing a contribution margin of t(e product at bot( price points. t is important to note t(at a%% prices (ae remained t(e same as t(e preious year )it( t(e e?ception of materia%s and supp%ies )(ic( )ere predicted to drop by 0> be%o) t(e --0 standard.
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January 23, 2015 Page 4 of 5 Variable Costs Compensation Insurance Direct Labor Power Materials Supplies Repairs
$ 0.39 $ 6.06 $ 0.11 $ 3.41 $ 0.24 $ 0.08 $ 10.29
$
$ 0.39 $ 6.06 0.11 $ 3.41 $ 0.24 $ 0.08 $ 10.29
Selling Price Selling price with discount
Contribution Margin Units Sold
+otal Contribution Margin
$ 22.50 $ 22.26 $ 11.97 1,000,000 $ 11,969,000
$ 24.50 $ 24.24 $ 13.95 750,000 $10,460,55 0
1y forecasting t(e sa%es figures )it( t(e predicted price points and unit sa%es, eac( scenario Superior )ou%d be at a great %oss, and )ou%d not be profitab%e. T(e contribution margin ca%cu%ation offers %itt%e insig(t to a so%ution to t(is prob%em, t(oug( faors t(e %o)er price %arge%y due to t(e increased units so%d. $na%y4ing t(is so%ution from a strategic point of ie), setting t(e price to 9.-- )it( tota% sa%es at E0,--- )i%% %et us to reduce t(e %osses, (o)eer t(is )ou%d on%y be a s(ort term so%ution due to t(e fact t(at maintaining t(is price (ig(er t(an t(e one of competitors in %ong term )i%% %i&e%y %ead to Superior %ose mar&et s(are.
,-" did Superior i.pro/e profitabilit" ro. !an 1 st to !une 30t-# $00)? T(e --0 statement )as usefu% because it proided feedbac& on Waters decision to not ma&e c(anges at t(e end of --<. T(e statements )ere increased in detai%, s(o)ing cumu%atie costs and ariances of tota% company actua% cots. T(oug( t(e fundamenta% f%a) of t(e --0 statement is t(at t(ey did t(e determine actua% product %ine reentues, costs and products. nstead unit
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prices )ere predicted and )ere not tai%ored to t(e current mar&et. T(is )ay, Superior can not accurate%y determine
CostS"ste. 2ppraisal t is e?treme%y important for Superior to (ae an effectie cost system. T(is )ay t(e company can actie%y monitor and predict its finances and gie current feedbac& on )(et(er t(ere management decisions are creating positie impact on t(e company. Wit( a company suc( as Superiors, t(e structure of t(e company offers %itt%e f%e?ibi%ity, as eac( factory at acts independent%y from eac( ot(er. T(is creates prob%ems since eac( product factory (as to be assessed indiidua%%y. 1y carefu%%y trac&ing e?penses Superior is ab%e to ma&e better *udgments on t(e progress of t(e company. T(e strengt(s of t(is system are t(at is can be easi%y carried out at %o) cost, )it( good punctua%ity, and coers t(e fu%% costs of t(e company. 1y using t(e gien data you can predict accurate cost data and ma&e good predictions. T(oug( is does %ac& detai%, and )ou%d benefit by creating mont(%y cost ana%ysis )it( furt(er brea&do)n of costs.
