Accounting 533 Case Study 2: DESTIN BRASS PRODUCTS CO.

Jeremy Knowles, Qun Xue, Tianxiang Gu

1. Describe the following:
a. The original cost system (used for Exhibit 3)
b. The improved system used by Peggy Alford to develop the revised unit
costs (in Exhibit 4)
Use a diagram showing the product as cost object and each of the costs that is
assigned to the cost object.
a. The original cost system, as Peggy called it, is a traditional cost accounting system.
In this cost system, the cost object consists of material cost, labor cost, and
overhead cost. As an illustration, all costs they pay for components go into material
cost, and labor cost is based on the standard times for run labor times the labor
pay rate, which is $16 per hour, and all other related manufacturing and
nonmanufacturing cost goes into overhead cost. Overhead cost per unit is based
on overhead rate times direct labor cost per unit, so overhead rate is calculated by
total overhead cost divided by total run labor cost. All in all, the standard unit cost
for this system consists of material, direct labor, and overhead.
b.
Cost Object

Material

Direct Labor

Overhead

c. The improved system used by Peggy Alford is activity-based costing system. In this
system, overhead cost is allocated based on activities. As an illustration, the cost of
material receiving and handling goes into material related overhead and set-up
labor cost is removed from total overhead for each product line. Also, other
overhead cost per unit is now on machine hour basis, which is calculated by
overhead absorption rate times machine hours for each product. As a result, the
standard unit cost for this new system consists of material, material overhead, setSet-up
labor
up labor, direct labor, and other
overhead.
Direct labor

Material
overhead

Cost Object
Other
Material overhead

3. Use a diagram to explain the cost system you used to assign the costs to products in part 2.
Activity Based Costing System
Direct Costs

Direct Materials

Direct Labor

Costs Objects
Direct Costs
Indirect Costs
asda

Cost-Allocation Base

in

Hours of use

#%
of transactionsMach
Hours per run # of transactions# of transactions
Quoted work order

Indirect Costs
Machine
Depreciation

Set up
Labor

Receiving

Materials
Handling

Engineering

Packing &
Shipping

Ma

4. Compare the unit costs from each of the methods. Which method would you
recommend to management and what are the reasons for your recommendation?
VALVES
Revised Units
Costs

Standard Unit
Costs
Material
Direct Labor
Set-up Labor
Total Direct Costs
Total Indirect Costs
Allocated
Total Cost Per Unit

16
4
20
17.56
$37.56
Standard Unit
Costs

Material
Direct Labor
Set-up Labor
Total Direct Costs
Total Indirect Costs
Allocated
Total Cost Per Unit

Material
Direct Labor
Set-up Labor
Total Direct Costs
Total Indirect Costs
Allocated
Total Cost Per Unit

20
8
28

Activity Base
Costs

16
4
0.02
20.02

16
4

28.98
$49.00
PUMPS
Revised Units
Costs
20
8
0.05
28.05

17.81
$37.81

20

Activity Base
Costs
20
8
28

35.12
30.9
20.82
$63.12
$58.95
$48.82
FLOW CONTROLLERS
Standard Unit
Revised Units
Activity Base
Costs
Costs
Costs
22
22
22
6.4
6.4
6.4
0.48
28.4
28.88
28.4
28.1
$56.50

19.08
$47.96

72.08
$100.48

I would recommend to management that they implement an activity-based costing

system based on two reasons. The first reason is that for some situations, material
related overhead has no relationship to labor based cost, or we can either say labor
related overhead has no relationship to material based cost. If we combine all types of
overhead together, the result could be vague. In this case, material receiving and
handling have no relationship with labor cost of machine activity, so using an activitybased costing system would be more appropriate. The second reason is based on the
sum of the unit cost for all three products. After our calculations, the unit cost under
the traditional costing system differs significantly with the revised units cost system
and the activity-based costing system. Under the activity-based cost system, we can
see that flow controllers are not nearly as profitable as previously believed and shown
in the traditional costing system. Therefore, based on the above two reasons, I would
say, activity-based costing system works better for Destin Brass Products Co.

Problem 5
Upon seeing your analysis, one of the manufacturing managers said, I dont
understand why we are spending so much time and effort on better cost allocations.
After we produce all the products and sell them, the total cost subtracted from total
revenues is the samethus the total profit is the same. Why bother? What difference
could it make? How would you respond?
Better cost allocations are important because they can help allocate indirect costs
based on the driver of the cost object. These improved allocations are not necessary
for external reporting, but they can save the firm when determining successful
product lines and recognizing the true impact a cost object has on business processes.
Once the performance paths between cost object and all costs associated with it are
established, then managers can better determine areas needing improvement, further
utilization of resources, or potentially closure if a cost object demands too much
activity for low return. Though an activity-based costing system is not externally
reported, establishing it can have a dramatic impact on the companys bottom line
and improving product pricing to keep the firm competitive.