Short Finance Case
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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.
2. Why do the results of your analysis in (1) differ from the costs generated by the existing system and the one proposed by Peggy Alford?
3. What are the strategic implications of your analysis? What actions would you recommend that Destin Brass take with respect to valves, pumps, and flow controllers?
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USING THE OVERHEAD COST ACTIVITY ANALYSIS IN EXHIBIT 5 AND OTHER DATA ON MANUFACTURING COSTS TO ESTIMATE PRODUCT COSTS
First the standard unit costs for each of the three items:
For the pumps the material cost is 20, direct labor is 8.0 and the overhead calculated at the rate of 439% of direct labor is 35.12. This gives us a standard unit cost of 63.12
For the valves the material cost is 16, direct labor is 4.0 and the overhead calculated at the rate of 439% of direct labor is 17.56. This gives us a standard unit cost of 37.56
For the flow controllers the material cost is 22, direct labor is 6.4 and the overhead calculated at the rate of 439% of direct labor is 28.10. This gives us a standard unit cost of 56.50
How do we get the overhead rate? The total labor cost will be 9,725 hours x 16 dollars gives us 155,600 giving an overhead rate of 682,688/155,600 that is 439%
Now using modified calculations we have the following:
For the pumps the material is 20, material overhead at 48% is 9.60, set up labor 0.05, direct labor 8.00 and other overhead on machine hour basis is 21,30. If we add these we get a different standard cost of 58.95.
For the valves the material is 16, material ...
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