kasus bridgeton industries
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Questions We Will Answer TodayHow are traditional cost systems designed?What are the limitations of traditional cost systems when used for internal decision-making purposes?What is a death spiral?
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Bridgeton Industries
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BackgroundThe ACF plant competes with other Bridgeton plants and local suppliers for a shrinking pool of production contracts.The ACF experienced a plant closing in the past with the shut-down of its diesel engine plant.
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Tell me what the consultants did.
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Strategic AnalysisBridgeton hired a consulting firm to classify all plants products as:
Class I products should remain at present locations.Class II were to be watched closelyClass III products were outsourced or dropped.Four criteria were supposedly used:
Quality, customer service, technical capability, and cost.
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Where did the consultants get their cost data?
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Where did the consultants get their cost data?Please tell me youre kidding!
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Describe Bridgetons existing cost system.
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The Cost SystemOne budgeted plantwide overhead cost poolOne allocation base
Direct labor dollars Utilization-based denominator volume
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What are the problems with this type of traditional cost system?
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The ProblemsOne heterogeneous plantwide overhead cost poolOne volume-related allocation
Direct labor dollars Reliance on a utilization-based denominator volumeDisregard of selling & administrative expenses
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Should Bridgeton be concerned about these limitations?
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Should Bridgeton Be Concerned About These Limitations?Yes! Because:
They have product diversity.The non-volume-related overhead dollars are material.They probably have unused capacity.
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Compute Bridgetons Plantwide overhead rate for 1988.
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1988 Overhead Rate$109,890 $25,294 = $4.3445 per DL$
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What overhead rate did the consultants use as quoted in the case?
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What overhead rate did the consultants use as quoted in the case?
435%, or essentially the same overhead rate used in Bridgetons traditional plantwide cost system.
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Why is this plantwide rate useless?
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Why is this plantwide rate useless?To assume that all overhead is driven by direct labor is flawed.
Miller and Vollmann graphTo assume that $109 million of overhead is driven by any single volume-related allocation base is very flawed.
Miller and Vollmann transactions framework (quality, change, balancing, and logistical transactions) Assigning used and unused capacity costs distorts product cost consumption
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What Distortions Will It Create?
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What Distortions Will It Create?It will overcost labor-intensive, high volume products and undercost non-labor-intensive, low volume products.It will overcost all products to the extent products are assigned unused capacity costs.
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Why do you think Mufflers/Exhausts and Oil Pans were the first products labeled Class III?
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Why Mufflers and Oil Pans?Fuel tanks: $4,238 $75,196 = 5.6%Manifolds:$6,027 $84,776 = 7.1%Doors:$2,731 $45,174 = 6.1%Muffler/Exhausts:$5,766 $66,266 = 8.7%Oil Pans: $6,532 $79,658 = 8.2%
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The Outsourcing DecisionMuffler/Exhausts and Oil Pans get outsourcedThe ACF responds by making as many improvements as possible.
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Compute Bridgetons budgeted plantwide overhead rate for 1989.
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1989 Overhead Rate$78,157 $13,537 = $5.77 per DL$Why did the rate go up?
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Compute the percent decrease in direct labor dollars from 1988 to 1989.
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Percent Decrease in DL$($25,294 $13,537) $25,294 = 46.5%
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Compute the percent decrease in each overhead account from 1988 to 1989.
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Percent Decrease in MOH Accounts1000 (28.6%)1500 (13.8%)2000 (46.5%)3000 (46.5%)4000 (17.2%)5000 (17.9%)
8000 (37.0%)9000 (12.2%)11000 (37.1%)12000 (46.5%)14000 (17.9%)
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The Death SpiralFixed overhead costs are being spread over a shrinking denominator volume.To make matters worse, those overhead costs that were consumed by products are probably being misallocated for reasons previously mentioned.Well done consultants!
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Why is Bridgetons approach okay for external reporting?
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Why is Bridgetons approach okay for external reporting?The wash effectThe segments vs. entity perspective
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Handout
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Utilization-Based Overhead RatesPlant AJune: ($120,000 + $500,000) 60,000 DLH = $10.33/ DLHJuly: ($100,000 + $500,000) 50,000 DLH = $12/DLH
Plant BJune: ($160,000 + $600,000) 80,000 DLH = $9.50/DLHJuly: ($180,000 + $600,000) 90,000 DLH = $8.67/DLH
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Product CostsPlant A:JuneJulyDM$15$15DL$10$10MOH$5.17$ 6Total$30.17$31
Plant B:JuneJulyDM$15$15DL$10$10MOH$4.75$4.34Total$29.75$29.34
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Capacity-Based Overhead RatesPlant AJune: ($200,000 + $500,000) 100,000 DLH = $7.00/DLHJuly: ($200,000 + $500,000) 100,000 DLH = $7.00/DLH
Plant BJune: ($200,000 + $600,000) 100,000 DLH = $8.00/DLHJuly: ($200,000 + $600,000) 100,000 DLH = $8.00/DLH
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Product CostsPlant A:JuneJulyDM$15$15DL$10$10MOH$3.50$3.50Total$28.50$28.50Plant B:JuneJulyDM$15$15DL$10$10MOH$4.00$4.00Total$29.00$29.00
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What is the unused capacity cost for each plant for each month?
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Unused Capacity Costs
JuneJulyPlant A:Fixed portion of rate$5.00$5.00Unused capacity in DLH 40,000 50,000 Unused capacity cost$200,000$250,000Plant B:Fixed portion of rate$6.00$6.00Unused capacity in DLH 20,000 10,000Unused capacity cost$120,000$60,000
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Questions We Answered TodayHow are traditional cost systems designed?What are the limitations of traditional cost systems when used for internal decision-making purposes?What is a death spiral?