Destin Brass Case
Table of Content
1. Use the Overhead Cost Activity Analysis in Exhibit 5 and other data on manufacturing costs to estimate product costs for valves, pumps, and flow controllers
When Activity Based Costing (Weetman, 2010, p. 85) is used to calculate the monthly cost per unit, two types of costs are distinguished. Firstly the direct costs, consisting of the direct
manufacturing …show more content…
The method we decided to use in question one is called Activity Based Pricing, where we allocate the total overhead based on the different activities in manufacturing. When it comes to ABC costing, costs are assigned different activities which in term are allocated
to products. This allows overhead costs to be allocated more directly to different units.
This is where ABC costing differs from the other costing methods, the overheads are allocated proportionately to the cost drivers of each activity cost pool. Thus in Exhibit 5 we can see the level of "demand" of a speciffic production activity derived from each individual product. Allowing us to accurately allocate the overhead costs. Given the fact that each of these activities have a different cost rate and that each product requires proportionately different amounts of handling, receiving, packing and shipping, engineering and maintenance, the total overhead allocated to each product will differ.
This allows us to differentiate the overhead costs of for exampel handling intensive products and maintenance intensive products, allowing us not only to see which products demand the highest production costs but also how and where in the production process costs are incurred. Which is the case for all production factors and products in the production process
(Weetman, 2010, p. 85). 3. What are the strategic implications of your analysis? What actions would you recommend to the managers