TBM Finale Reporte

Members of Group 8.0 Elmahie Elshikh Elajab Elshikh MR08 Haidar Habib Mustafa MR08 Kaziwa Kader KhalidMR08 Safnimarina Safian MR06

1123 1124 1142 1029

Tijuana Bronze Machining Group Case Study

As time goes by, it becomes clear to me that our competitions are crazy. Pumps are a major product in a big market for all of us, but with the prevailing price cutting mentality no one will be to sell pumps profitably as long as we all are forced to match each others’ lower prices. I guess we should be grateful that competitors don’t play the same foolish game in valves and flow controllers. Even with the 12 ½% price increases, we don’t see any new competition in flow controllers. -Herb Alpert, President

T ABLE

OF

C ONTENTS

List of Figures Figure 1.0: TBM revenue based on the products ...................................................5 Figure 2.0: Percentage of conclusion derived from the case study .......................... 21 List of Tables Table 1.0: TBM performance ...............................................................................6 Table 2.0: TBM Product Profitability Analysis ........................................................7 Table 3.0: Product cost for valves, pumps and flow controller .................................8 Table 4.0: Contribution margin for valves, pumps and flow controller .......................9 Table 5.0: Revised product costs ....................................................................... 10 Table 6.0: Comparison between standard costs and revised standard cost of TBM ... 11 Table 7.0: Product cost based on ABC approach ................................................. 12 Table 8.0: Product Profitability under 3 products costing system ........................... 13 1.0 Introduction ............................................................................................ 2 Background ......................................................................................................3 2.0 Performance ............................................................................................ 5 Company’s Effort ...............................................................................................7 Calculation Report Analysis 1.0 Product cost per unit ............................................................................8 2.0 Estimation of contribution margins for 3 products ....................................9 3.0 Revised Product Costs ....................................................................... 10 4.0 Product Costs of 3 products based on ABC approach .............................. 12 5.0 Comparison of reported income between 2 methods .............................. 13 6.0 Comparison of product profitability under 3 costing system .................... 13 7.0 Using ABC to re-evaluate JIT purchasing policy for flow controller ........... 14 3.0 Identification of Problems ..................................................................... 16 4.0 Recommendations ................................................................................. 17

Option 1: Drop Flow Controllers? ....................................................................... 17 Option 2: Or Raise Selling Price? ...................................................................... 18 Option 3: What about the pumps? ..................................................................... 18 Option 4: Reduction (Re-engineering) for Pumps? ....................................... 18 Option 5: How Are Valves Doing? ..................................................................... 19 5.0 Conclusion ............................................................................................. 20 References................................................................................................... 22 Appendix ..................................................................................................... 23 The calculation part ........................................................................................ 24 Group Action Project ........................................................................................ 30

Managerial Accounting Group 8.0 |

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1 Introduction Tijuana Bronze Machining is basic case Activity-Based Costing (ABC) and Activity-Based Management (ABM). There is enough richness to the fact. Situation to create non-trivial calculations is rich enough to support good discussion on the managerial implications.

This case is designed to familiarize with the behavioral and technical variables that can aid or impede successful ABC implementation. In this case, the casting role of a business consultant was used to synthesize the case study's key "change management" insights into a report that could be shared with coworkers in an intranet-based knowledge management system. Implementing change in an organization is about ninety percent (90%) cultural and ten percent (10%) technical. This is because the organization dynamics, politics, and search for a champion that go on are the real issues that make or break the project. One of the reasons to be able to implement ABC successfully was because the right people became champions.


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Background Tijuana Bronze Machining (TBM) was established by Alpert in 1984 when he purchased a moribund commercial machine shop on the California coast south of San Diego. He had sensed an opportunity in a conversation with the president of a large manufacturer of water purification equipment who was dissatisfied with the quality bronze valves available.

He formed a partnership with les Paul, locally famous for the highquality bronze boat fittings he manufactured for fleet along the Southern California and Baja coast. Alpert had recently retired from the United States Air Force, where he had a long record of administrative successes. The two then selected Mary Ford, an accounting with manufacturing experience, to join them. Paul was quick to analyze the nature of problems other manufactures were having with water purification valves. Since the tolerances needed were small, maintaining them required great labor skill and expensive machine controls.

Within weeks of forming the company, Paul and his shop crew were manufacturing valves that met or exceeded the needed specifications. Alpert negotiated a contract with one purification equipment manufacturer, and revenues soon were earned. Tijuana Bronze Manufacturing is a producer of valves, pumps, and flow controllers. Alpert, who had a long record of administrative successes, back in 1984, established it. He partnered with Les Paul, a high quality bronze boat fittings manufacturer and Mary Ford, an accountant with manufacturing experience. Since tolerances for water purification are small, maintaining them required great labor skill and expensive machine controls. From the start, Alpert either met or exceeded customers’ specifications. Shortly after, TBM created an engineering department and designed new products knowing that the same manufacturing skills used in creating machine valves could also be used in manufacturing pumps and flow controllers, since the valves alone did not utilize TBM’s full available capacity. The same equipment and labor were used for all three-product lines and runs were scheduled to match customer-shipping requirements to eliminate finished goods inventory. Their raw materials suppliers also agreed to use just-in-time deliveries and products were packed and shipped as completed.


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Regarding their products, valves composed 24% of the company’s revenues and were created from four bronze components. Paul had designed the machines that held each component while it was machined automatically. Precise machining was too expensive to compete in a nonspecialized valve market and all monthly production of nonspecialized valve market took place in a single production run, right before it was shipped to each customer upon completion. Paul felt competitors could match quality, but none had tried to gain market share by cutting price. Gross margins amounted to 35%. Pumps made up 55% of the revenues and manufacturing processes were similar to valves but a lot less intricate. The pumps were sold through seven distributors and orders were stable as long as TBM matched competitive prices. The company scheduled five production runs each month. Prices were under pressure since the market was large and specifications were less exact. Because there was no design advantage, it had no choice but to match lower prices or give up its market share. Margins had fallen from a planned 35% to 22%. Lastly, flow controllers created 21% of revenues. More components were needed for each finished unit, but less labor was required. The product was added to the line because it helped fill excess machining capacity. They are distributed in 22 shipments to distributors and customers. There is almost no competition in this market and even when prices were raised 12.5%,

there was no effect on demand. Management is discussing possible changes in their operations: for example, how to allocate overhead to products. They are unsure whether they should continue to use traditional cost accounting or activity based costing. One choice would be to forego the overhead cost allocation altogether and instead charge it off as a period expense. For overhead costs that could not be traced directly to product lines, the other choice was to allocate on the basis of transactions. Both have their advantages and their disadvantages and they needed to weigh out both. They decided to experiment with estimates to see how the product costs might be affected. They began with discussing transactions and efforts related to each type of overhead cost. They then created an analysis


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2 Performance To analyze the situation of Tijuana Bronze Machining, the past performance was taken consideration. The valves, pumps and flow controller become their main products and contribute the company’s revenue as follows.

Pumps 55%

Valves 24%

Flow Controller 21% Figure 1.0: TBM revenue based on the products

As for the pumps, although the manufacturing process is similar to valves only with a little less precision, the prices to distributors had been under considerable pressure. The gross margin for pumps had fallen below the company’s planned gross margin by 22% with revenue of 55%. One of the reason lead to this down turn is that the company had no design advantage in pumps. So in order to survive they had to match the lower prices or give up its market share. The flow controller had regulated the rate and direction of the flow of liquids by 42% gross margin up away from the standard gross margin setup with 21% of revenue. This product was added to help fill the excess machining capacity. The company identified that this product had a good market as the flow controllers had almost no competition in the market compared to other two products. With that performance the flow controller prices was raised by 12.5% with no apparent effect on demands. The details of the performance are depicted in the table 1.0.

The standard gross margin has been setup by 35%. From the standard percentage, the valves have been maintained at the standard with revenue of 24%. So this means that their expense for the machining made is successful although the TBM’s valves are too expensive to compete in the nonspecialized valves market. No competitors could match TBM’s quality in valves as the result of none of the competitors tried to gain the market share by cutting the price.


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Table 1.0: TBM performance (Using standard gross margin as the benchmark)


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Company’s Effort As an effort of Tijuana Bronze Machining (TBM) company based on their performance, what they had done so far can be depicted in the answers of each questions provided. To begin with the product profitability analysis is created to identify the potential problems they are facing.

What the company has done to capture the essence of global competitive advantage is they come up with the product profitability analysis.From the table a statement concerning the competition in pumps versus flow controller a raised.

Table 2.0: TBM Product Profitability Analysis


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Calculation Report Analysis As an effort to solve the problems of Tijuana Bronze Machining facing, the calculation answers were made to analyze the options. 1.0 Product Costs per unit for valves, pumps and flow controllers Based on Exhibit 2 information, the calculation or workflows of the calculation derivation are shown below:

Valves $16.00 4.00 17.56 $37.56

Materials Direct Labor based on run labor *Manufacturing overhead Total Standard cost

Pumps $20.00 8.00 35.12 $63.12

Flow Controller $22.00 6.40 28.10 $56.50

Table 3.0: Product cost for valves, pumps and flow controller

The Overhead calculation are as follows: Machine depreciation Set up labor Receiving Materials Handling Engineering Package Shipping Maintenance Total

Total run labor = = Overhead rate = =

$ $ $ $ $ $ $ $

270,000 2,688 20,000 200,000 100,000 60,000 30,000 682,688

9725 hrs x $16 $155,600

$682,688 $155,600 4.387455013

* Manufacturing overhead =

or 439% 439% x direct labor Direct labor =

$16 LPH x run labor hours per unit


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In Exhibit 2, the measurements are built based on the direct and indirect costs and on assumptions about the production and sales activity. Each unit of the product is charged for material cost based on the prices that the company’s pay for components, and for labor cost based on the standard run labor times priced at $16 per hour. Based on the price of direct labor $16 labor per hour times with the labor hours per unit for each product, the manufacturing overhead costs for each product can de derived by multiplying the overhead rate (439%) with direct labor cost. With that calculation it shows how the amount stated in Exhibit 1 derived. For Valves the standard unit cost is $37.56, pumps %63.12 and flow controllers are $56.50. 2.0 Estimation of Contribution Margins for the three products To estimate the contribution margins for the three products, the contribution margin principle is used. Contribution margin =Sales - Variable Cost

Taking the information from Mary Ford’s conversation, the product profitability will be measured at the contribution margin level, which is price less all variable costs. While the situation, only the short run variable cost is direct material.

Revenue Variable costs (Materials only) Contribution Margin

Valves $57.78 16.00 $41.78

Pumps $81.26 20.00 $61.26

Flow Controller $97.07 22.00 75.07

Table 4.0: Contribution margin for valves, pumps and flow controller

After calculate the contribution margin, the Flow controller shows the most contribution margin with $75.07 compare to valves and pumps are $41.78 and $61.26 respectively. But the amount of the contribution margin should not disregard the overhead cost as because the marginal customers that willing to pay marginal prices are based on marginal costs. From the outset, they have succeeded in part because they insisted on trying to maintain the 35% gross margin including allocated manufacturing overhead. So in order to try the modern view of the proper way to allocate the cost question 3 leads to the revised product costs mentioned by Mary Ford.


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3.0 Revised Product Costs Based on the information in Exhibit 2, the revised product unit cost per “More Modern View” Valves $16.00 7.68 0.02 4.00 21.30 $49.00

Materials *Material Related Overhead Setup Labor Direct Labor **Other Overhead Revised Standard Cost

Pumps $20.00 9.60 0.05 8.00 21.30 $58.95

Flow Controller $22.00 10.56 0.48 6.40 8.52 $47.96

Table 5.0: Revised product costs

The significant of the calculation was first to identify the material related overhead (the cost of receiving and handling material) and allocated that to each product line based on the cost of material.

*Material Related Overhead Receiving Material Handling Total

$20,000 $200,000 $220,000

Overhead Allocation rate on Materials Cost = = So material overhead for the 3 products =

$220,000 $458,000 0.480

or 48%

48% x Material Cost

The related overhead for the material of valves, pumps and flow controller are $7.68, $9.60 and $10.56 respectively. To calculate the revised standard cost, the other overhead is derived by calculating the overhead allocation rate times the machine hours. This can be depicted in the work flow below. To get the revised standard cost, the total up of materials, material related overhead, setup labor, direct labor and other overhead is sum up.


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**Other Overhead on Machine Hour Basis Machines Depreciation Engineering Packing and Shipping Maintenance Total

$ $

270,000 100,000

$

60,000

$ $

30,000 460,000

Overhead Allocation Rate= =

$460,000.00 10,800 hrs $42.59

To calculate other overhead =

machine per hour

$42.59

x Machine Hours

After the calculation, the revised standard cost for valves is $49.00, while pumps are $58.95 and Flow controller is $47.96.The comparison calculation is depicted in the table 6.0 below. The result of this revision made sense to the reason why the competitors are chasing lower prices in the pump market. The revised standard cost for pumps is more than $4.00 below the present standard and would show a gross margin percentage of 27% compared to the current 22%.

Products Valves Pumps Flow Controller

Standard Cost $37.56 $63.12 $56.50

Revised Standard Cost $49.00 $58.95 $47.96

Table 6.0: Comparison between standard costs and revised standard cost of TBM


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4.0 Product Cost of the 3 products based on ABC approach Based on the Exhibit 2 and Exhibit 3 information, the product costs for valves, pumps and flow controllers is calculated using the “ABC” approach (Activity Based Costing) as follows:

Materials Labor Overhead: Setup Labor Receiving Material Handling Packing & Shipping Engineering Maintenance Machine Depreciation Total Overhead Total Cost

Valves

Pumps

Flow Controller

Total

120,000 30,000

250,000 100,000

88,000 25,600

458,000 155,600

128 600 6,000 2,400 20,000 10,500 93,750 133,378 37.78

640 3,800 38,000 13,800 30,000 17,400 156,250 259,890 48.79

1,920 15,600 156,000 43,800 50,000 2,100 20,000 289,420 100.76

2,688 20,000 200,000 60,000 100,000 30,000 270,000 682,688 1,296,288

Table 7.0: Product cost based on ABC approach

From table 7.0, it shows that using Activity Based Costing (ABC) the valves total cost is $37.78, while a pump is $48.79 and the flow controller is $100.76. Based from the ABC approach the cost can identify the costs pools, or activity centers in the company and assigns the costs to products and services (cost drivers) based on the number of transactions involve in the process of providing a product. It is to be viewed to maximize shareholder value and improve the company’s performance. With the costing based on activities some advantages for the company is identified:     

Accurately predict costs, profits and resource requirements associated with changes in production volumes, organizational structure and resource costs. Easily identify the root causes of poor financial performance. Track costs of activities and work processes. Equip managers with cost intelligence to drive improvements. Achieve better Positioning of products

From table 7.0 too, the company detect that the flow controller product cost much more compared to the standard cost and the range of high or lower amount is calculated for the following month, when the quantities produced and sold, activities and costs were all standard.


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5.0 Comparisons of Reported Income between the Two Methods After made a comparison between the two systems, there will be no difference. Each month reflects two different methods of assigning the same actual costs to the three products. The total results for the company will be identical. 6.0 Comparison of Product Profitability under Three Costing System Valves

Pumps

Flow Controller

Actual Selling Price Standard Cost Gross Margin Gross Margin %

$57.78 37.56 20.22 35%

$81.26 63.12 18.14 22%

$97.07 56.50 40.57 42%

Revised Cost Gross Margin Gross Margin %

49.00 8.78

58.95 22.31 27%

47.96 49.11 51%

37.78 20.00

48.79 32.47

100.76 -3.69

35%

40%

-4%

ABC Cost Gross Margin Gross Margin %

15%

Table 8.0: Product Profitability under 3 products costing system

The total reported results are the same for the company under the three methods. The accounting allocations for individual product lines change the gross margins significantly. Product line profitability changes most significantly for flow controllers under ABC, dropping from the highest gross margin product to a loser. Given the "complexity" reflected in Exhibit 3 for flow controllers, the activity/transactions costing system bears out the higher proportion of costs. Therefore it is "better" than other systems. Also, although there could be differences in some cost allocations such as engineering and maintenance, 100% of the costs are allocated on a reasonable resource consumption basis using ABC.


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7.0 Using "ABC" to Re-evaluate JIT purchasing policy for flow controller According to the case study, Flow Controllers require ten components for each of ten runs per month for a total of 100 receipts and 200 material handling transactions under the JIT arrangement with suppliers. The total cost of both receiving and material handling is $220,000 ($20,000 receiving and $200,000 material handling). Receiving and inbound handling is $140,000 of this total ($20,000 + 0.6 x $200,000) Under a "just-in-case" or JIC practice where all components for a month's Flow Controller production will be purchased together, the total receiving and material handling costs will be only $14,000 (1/10 the cost). Some assumptions will be necessary for calculating inventory storage and carrying cost charge. The total cost of flow controller components purchased each month is $88,000. Assume uniform production during the month so that the average inventory cost is $44,000 (50% x $88,000). Assume carry costs are 100% per year, including a capital charge for space, space costs (maintenance, etc.), handling costs (labor, etc.), carrying costs (insurance, taxes, etc.), and cost of funds. Applying a monthly carrying cost rate of 8.5% (100% / 12 months), the monthly storage and carrying cost is $3,740 (.085 x $44,000). With a lower overall carry cost percentage, this number is even lower. Looking back at the calculation the company found out that: Just-in-Time Costs: $140,000 Just-in-Case Costs: Receiving & material handling $14,000 Carrying cost~4,000 18,000 Net savings per month using "JIC" 122,000 If TBM can reduce the receiving and in-bound material handling costs, there is a potential net savings of almost $1.5 million per year ($122,000 for 12 months) by using monthly purchasing, versus JIT. If we assume the $140,000 total costs are fixed, then there are no savings. But, if all costs are totally fixed, who cares about any allocation scheme anyway? "JIC" for Flow Controller Purchasing? This alone lowers cost by ~$30.5 per unit ($122,000 / 4,000 units) which yields a 28% gross margin at current prices! [(97-70) / 97 = 28%].


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There seems no good logic for buying ten times per month, given the high cost of receiving and in-bound handling. The basic ABC idea that receiving cost is driven by number of receipts, without regard to the number of items being handled was considered. This is because, for valves, one receipt is 7,500 items. For flow controllers, one receipt is about 400 items. The question of what is the nature of the process such that one transaction of 7,500 items costs the same to process as one transaction of 400 items has been debatable.


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3 Identification of Problems Referring to the company’s data and the conversation, their expenditure is very high and getting less profits. The company makes three products: Valves, Pumps and Flow Controllers.

Valves It seems the company has no problem with Valves, even though the expense of price machining to make valves too expensive but the merit for TBM’s company is that the competitors don’t use cutting price strategy for valves. After allocating ABC it will be clear that the company doesn’t need to change their strategy for valves. Pumps Pumps are a major product in a big market; there are many rivals for this product competing in the market. Cutting price by the competitors forced TBM to cut pumps selling price in the market, but in the same time the expense for pumps is high. The profit cannot be seen if the company cuts its selling price as much as the competitors do. The company’s planned gross margin for pumps is 35% but the actual gross margin had fallen to 22% way to far from the standard margin. Flow controllers Even though TBM has added Flow controllers to use idle capacity, but the expenses for this product is very high it is more obvious when we allocate ABC system. It ensures that the company makes losses on selling Flow controllers.


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4 Recommendations The recommendations that can be suggested to the management were stated by looking at how well the company’s doing. How are they doing? Looking back at the Planned Sales (assume volumes have not changed) calculation: Valves (7,500 x 12 x $58) = $ 5.2 million Pumps (12,500 x 12 x $97) = 14.6 million Flow Controllers (4,000 x 12 x $87) = 4.2 million $24 million Actual annual sales were only about $22 million at current prices. By assuming the profit plan at planned prices produced an adequate return on investment; the current situation is about 2 million of negative economic income. They need to be earning about $2 million more profit per year, somehow! OPTION 1: Drop Flow Controllers? As for the first option suggested to the management team, they can adding flow controllers to the product line (to use idle capacity?) or doubled the manufacturing complexity (4 or 5 components versus 10 components). But one thing that they might have to consider is, is this a reasonable thing to do in the factory? Reason If flow controllers were dropped, how much short-run cost-savings could be realized? This question cannot be answered by ABC, which is not based on a variable cost and fixed cost dichotomy. For example, one half the engineering costs are subjectively assigned to flow controllers. But will $50,000 of engineering cost be avoided if flow controllers were dropped? This does not change the conclusion that on a fully allocated basis, flow controllers have a negative gross margin, let alone providing any bottom line profit.


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OPTION 2: Or Raise Selling Price? Given the "no-competition" market for flow controllers, perhaps the selling price could be increased gradually, but who knows? Who are the customers? What do they want? How much will they pay? Given the uncertainty expressed by management in this market, there seems to be little harm in this pricing strategy, assuming management wishes to keep the product line after seeing the ABC results. But, one must note that the higher the selling price, the more likely TBM will see some competition and/or reduced demand. And, if the purchasing policy is changed per Question 7, there is really no major problem at all with flow controller profitability. OPTION 3: What about the pumps? The selling price for flow controllers increased more than 12% this past month while the selling price for pumps decreased more than 16%. The ABC analysis indicates that pumps still have the highest gross margin (40%) at the actual selling price. The gross margin would be 35% at a price of $75.06, which would allow still further price cuts of $6.20 per unit. Given by the commodity pricing pressure on pumps and if 35% is really TBM's necessary gross margin before SG&A expenses to earn an adequate rate of return, then a further 5% decrease to approximately $75 can be made without harming the target gross margin. This assumes the ABC costs per unit do not change. OPTION 4: Cost Reduction (Re-engineering) for Pumps? There is a lot of buyer power in this market, so TBM must undertake cost reduction and re-engineering programs to be the low cost producer. The case says pumps require less precision manufacturing than valves. Pumps involve only one more component than valves. There are approximately 58 workers on board and average wage (plus benefits) is $16 per hour. At 25% benefits, an approximate wage rate is $13 per hour, which is on the high side for industrial manufacturing jobs along the Mexican border at the time of the case. Perhaps less skilled machinists could be used on the pumps (and flow controllers)? Although automation is touted by management, direct labor represents 12% of the total manufacturing costs. Again, some cost savings may be possible. Also, eight hours for a set-up!


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OPTION 5: How Are Valves Doing? Apparently, the one valve customer is pleased with their quality and competitive price. Competitors are not attempting price cuts. The case implies that automation and efficient production processes are helping control costs and efficiency. But is it good strategy for TBM to be dependent on a single customer for valves? The ABC gross margin is 35% for valves so no action seems necessary to raise or lower prices. A question for management: Is there no growth in this market? Evidently, the company makes pumps and flow controllers to fill out the production capacity. Can we really continue long-run with 24% of sales in a no-growth market with a single customer? And all of these options of recommendations can lead to the conclusion.


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5 Conclusion The conclusion is that the idea of JIT is always "good"- not when receiving and handling costs are as high as in this case. While the concept of ABC is a dynamic concept based on cost management, where areas ABC is a static concept based on cost measurement.

Based on the recommendations provided to the management team, the ABC concept can be applied accordingly in certain situation. For option 1, they should consider the impact of dropping the flow controllers, as the flow controller are much related with the option 2 of raising the selling price. If the purchasing policy is changed per Question 7, there is really no major problem at all with flow controller profitability. While option 3 gives the company an opportunity to implement the ABC concept as the ABC analysis indicates that pumps still have the highest gross margin (40%) at the actual selling price. Then a decrease 5% in cannot harm the target gross margin. This assumes the ABC costs per unit do not change. As for option 4, they should consider to do re-engineering or cost reduction to the pumps. As per reasons mention in the recommendation of option 4 they can not only save the cost of the setup but also they can lure the buyer power in the market. To go on for the option 5 on the valves, it is thinkable as the ABC gross margin is 35% for valves so no action seems necessary to raise or lower prices. This option strategy is on the growth of the market. Because evidently, the company makes pumps and flow controllers to fill out the production capacity.


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As a whole conclusion, this project work was on ABC calculation and the ABM managerial implications. it designed to augment managerial and cost accounting study, while the case situation develops the ability to apply cost analysis to decision-making situations. Thoroughly tested and proven highly effective, the cases provide challenging and fun problems that help build skills with managerial and cost accounting techniques. Based on real-life scenarios, the cases give the opportunity to analyze the situation, decide which accounting concept is most appropriate, and apply the concept as the manager of a firm. As a result here is the general conclusion on what the team gets in the end of this case study:

Calculation- ABC implication

10% 30%

Analysis of data 50% 10%

Decision making-ABM concept Team work

Figure 2.0: Percentage of conclusion derived from the case study

Based on the case study, the team had found out most of the questions asked revolving around the ABC approach calculation which is approximately 50% of the overall content of the case study. While another 30% revolved around on how to determine the decision making by using the ABM concept and other 10% respectively were on how to analyze the data generally and the correlation of team work to determine the solution for the case study.


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REFERENCES

B OOKS Drury, C. (2004). Management and Cost Accounting, 6th Edition. In C. Drury. Thomson. Ray Garrison, R. G. (2008). Managerial Accounting, 12th edition. In R. G. Ray Garrison, Managerial Accounting, 12th edition (p. 309). Boston: McGraw-Hill Higher Education.

Websites (n.d.). Retrieved from stock.xchng - the leading free stock photography site: http://www.sxc.hu (2004-2009). Retrieved from accountingcoach: http://www.accountingcoach.com/onlineaccounting-course/36Xpg01.html (2006). Retrieved from askmehelpdesk: http://www.askmehelpdesk.com (2007). Retrieved from social publishing : http://www.scribd.com (2009). Retrieved from valuebasedmanagement.net: http://www.valuebasedmanagement.net/methods_abc.html

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APPENDIX

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Managerial Accounting: Group Project Activity Based Costing Question 1 Product Cost per Unit - Current System

Valves $16.00 4.00 17.56 $37.56

Materials Direct Labor based on run labor *Manufacturing overhead Total Standard cost

The Overhead calculation are as follows: Machine depreciation Set up labor Receiving Materials Handling Engineering Package Shipping Maintenance

$ $ $ $ $ $ $ Total $

270,000 2,688 20,000 200,000 100,000 60,000 30,000 682,688

Pumps $20.00 8.00 35.12 $63.12

Flow Controller $22.00 6.40 28.10 $56.50

$16 LPH x 168hrs

Total run labor = 9725 hrs x $16 = $155,600 Overhead rate =

=

$682,688 $155,600 4.387455013 or 439%

* Manufacturing overhead = 439% x direct labor

Direct labor = $16 LPH x run labor hours per unit

tbm_CASESTUDY

Managerial Accounting: Group Project Activity Based Costing Question 2 Estimated Contribution Margin for the 3 products

Revenue Variable costs (Materials only) Contribution Margin

Valves $57.78 16.00 $41.78

Pumps $81.26 20.00 $61.26

Contribution margin = Sales - Variable Cost

Products

Standard Cost

Revised Standard Cost

Valves Pumps Flow Controller

$37.56 $63.12 $56.50

$49.00 $58.95 $47.96

tbm_CASESTUDY

Flow Controller $97.07 22.00 75.07

Managerial Accounting: Group Project Activity Based Costing Question 3 Revised Product Unit Cost per "More Modern View"

Valves $16.00 7.68 0.02 4.00 21.30 $49.00

Materials *Material Related Overhead Setup Labor Direct Labor **Other Overhead Revised Standard Cost

Pumps $20.00 9.60 0.05 8.00 21.30 $58.95

Flow Controller $22.00 10.56 0.48 6.40 8.52 $47.96

*Material Related Overhead Receiving Material Handling Total

$20,000 $200,000 $220,000

Overhead Allocation rate on Materials Cost =

$220,000 $458,000

= 0.480

or 48%

So material overhead for the 3 products = 48% x Material Cost

**Other Overhead on Machine Hour Basis

Machines Depreciation Engineering Packing and Shipping Maintenance Total

$ $ $ $ $

270,000 100,000 60,000 30,000 460,000

Overhead Allocation Rate= = To calculate other overhead =

tbm_CASESTUDY

$460,000.00 10,800 hrs $42.59

machine per hour

$42.59 x Machine Hours

Managerial Accounting: Group Project Activity Based Costing Question 4 Products Costs Using Activity Based Costing

Valves Materials Labor Overhead: Setup Labor Receiving Material Handling Packing & Shipping Engineering Maintenance Machine Depreciation Total Overhead Total Cost

Pumps Materials Labor Overhead: Setup Labor Receiving Material Handling Packing & Shipping Engineering Maintenance Machine Depreciation Total Overhead Total Cost

Flow Controller Materials Labor

(a) Activity Rate $16.00 $4.00

(b) Activity 7,500 7,500

0.02 0.08 0.80 0.32 2.66 1.40 12.50 $17.78 $37.78

(a) Activity Rate $20.00 $8.00

(a) x (b) ABC Cost 120,000 30,000 128 600 6,000 2,400 20,000 10,500 93,750 133,378 283,378

(b) Activity 12,500 12,500

0.05 0.30 3.04 1.11 2.40 1.39 12.50 $20.79 $48.79

(a) x (b) ABC Cost 250,000 100,000 640 3,800 38,000 13,800 30,000 17,400 156,250 259,890 609,890

(a) Activity Rate $22.00

(b) Activity 4,000

(a) x (b) ABC Cost 88,000

$6.40

4,000

25,600

Overhead: Setup Labor

0.48

1,920

Receiving

3.90

15,600

Material Handling

39.00

156,000

10.95 12.50 0.53 5 $72.36 $100.76

43,800

Packing & Shipping Engineering Maintenance Machine Depreciation Total Overhead Total Cost

Materials Labor Overhead: Setup Labor Receiving Material Handling Packing & Shipping Engineering Maintenance Machine Depreciation Total Overhead Total Cost

50,000 2,100 20,000 289,420 403,020

Valves

Pumps

Flow Controller

120,000 30,000

250,000 100,000

88,000 25,600

458,000 155,600

128 600 6,000 2,400 20,000 10,500 93,750 133,378 37.78

640 3,800 38,000 13,800 30,000 17,400 156,250 259,890 48.79

1,920 15,600 156,000 43,800 50,000 2,100 20,000 289,420 100.76

2,688 20,000 200,000 60,000 100,000 30,000 270,000 682,688 1,296,288

tbm_CASESTUDY.xlsx

Total

Managerial Accounting: Group Project Activity Based Costing Question 5 Comparisons of Reported Income Between the Two Methods

There will be no difference. Each month reflects two different methods of assigning the same actual costs to the three products. The total results for the company will be identical.

tbm_CASESTUDY

Managerial Accounting: Group Project Activity Based Costing Question 6 Comparison of Product Profitability Under Three product Costing System Valves

Pumps

Flow Controller

Actual Selling Price Standard Cost Gross Margin Gross Margin %

$57.78 37.56 20.22 35%

$81.26 63.12 18.14 22%

$97.07 56.50 40.57 42%

Revised Cost Gross Margin Gross Margin %

49.00 8.78 15%

58.95 22.31 27%

47.96 49.11 51%

ABC Cost Gross Margin Gross Margin %

37.78 20.00 35%

48.79 32.47 40%

100.76 -3.69 -4%

System favor and reason why: The total reported results are the same for the company under the three methods. The accounting allocations for individual product lines change the gross margins significantly. Product line profitability changes most significantly for flow controllers under ABC, dropping from the highest gross margin product to a loser. Given the "complexity" reflected in Exhibit 3 for flow controllers, the activity/transactions costing system bears out the higher proportion of costs.Therefore it is "better" than other systems. Also, although there could be differences in some cost allocations such as engineering and maintenance, 100% of the costs are allocated on a reasonable resource consumption basis using ABC.

tbm_CASESTUDY

GROUP ACTION PLANS (Haidar; Elmahie; Kaziwa; Safni)   No:

MA_01

Objectives: 

Initiatives:

To understand the ABC and ABM concept To plan and recommending a new practice to better enhance the previous norms of the organization- transition from traditional costing approach to modern costing approach To present the strategic problems or opportunities identified in the organization which will give a direct impact on the goals of the unit organization.

Process of fulfilling the Managerial Accounting Group Project Paper requirement successfully.

Action Plans/Milestones

Period

Person responsible

1. The case study title  Tijuana Bronze Machining

Case study handed on 29/08/09 (Saturday)

All

2. Arrange a delegation tasks and discuss the outlines.

First attempt 29/08/0931/08/09 (SaturdayMonday)

All (discuss in class and via online)

3. Assigned the 2nd meeting to report the first result.

5/09/09 or 6/09/09 (SaturdaySunday) [Yet to be confirmed]

4. Set up another meeting to report based on the tasks assigned.

Expected ready by Friday on 4/09/09

Output



Review and read the case study Get the general idea on what the case study discussed



 Haidar - Answer questions 1 and 2

Rough Outlines for the Case study (Refer to page 3)

 

- extra findings  Elmahie



Group Action Plans Answers of questions 1 to 8 Extra findings data

- Answer questions 3 and 4

- extra findings  Kaziwa - Answer questions 5 and 6

- extra findings  Safni - Group Action Plans - Answer questions 7 and 8

- extra findings

Managerial Accounting Group 8 |

30

GROUP ACTION PLANS (Haidar; Elmahie; Kaziwa; Safni)

5. Collection of data  Prepare the presentation  Findings from external sources (internet/books) to support

7/09/09 12/09/09 (MondaySunday)

 Safni– Presentation Templates and report wrap up  Elmahie – input all the data in slides  Haidar & Kaziwa- make sure the calculation answer presented in excel form



Tijuana Bronze Machining Presentation slides

6. 3rd meeting discuss the preparation of the report according to the tasks assigned.

13/09/009 (Sunday) Time frame to do the report (13/09-09 26/09/09) Expected ready by 27/09/09

All



Tijuana Bronze Machining Report

7. The compilation of the final (the total page would be confirm later) 8. Appoint one presenter

27/09/09 (Sunday)

9. Recheck and correct

11. Submit and present

Barriers

Due till one day before submitted date

Recheck with Prof and members of classmates- Are we in the right track?

Tijuana Bronze Machining Case Study Complete Need to be concise and precise in developing the report Time to meet and discuss the project Need full understand the ABC concept and trivial challenge calculation questions

25/10/09 (Sunday)   

All

 Final report  Presenter  Presentation slides

All

yang besar


31

GROUP ACTION PLANS (Haidar; Elmahie; Kaziwa; Safni)

OUTLINES FOR PRESENTATION & REPORT: 1. Company’s Background  Description of the company history including: o Business involved o The company’s performance (for benchmark) 2. Company’s Effort  What they have done to capture the essence of global competitive advantage o The accounting calculation (questions given 1-7) 3. Identification of the current problems  Dictation of what problems of managerial accounting practice concerned  List of the problems identified  Problem to focus on- more or less on what they should done to solve the problems o Traditional costing approach to Modern Costing approach o JIT policy o Product costing system 4. Suggestion Planning/ Recommendations/solutions towards the problems   

The pros and cons of action project solutions. The impacts towards the company Supported analysis the recommendation- accounting for sustainability

5. Conclusion The report would be more precise on the calculations and the reasons behind it (answering all the questions requirements) Please feel free to add or delete as needed. Ideas on the outlines would be much appreciated. Kindly inform me what you think (agree or do not agree or want to change) about the dates provided on the table so that we can include this group action plans in our report too. THANKS and Happy Ramadhan


32

TBM Finale Reporte

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