Destin Brass Notes

First, remember that, with this case, we are addressing the "second stage
of the cost accounting effort. During this stage we "attach a mission
center's costs to the products that pass through it. This is quite easy if all
prod- ucts are the same, but more difficult if there is a mix of products. For
example, in the Owen Hospital situation in the lecture, all dialyses were the
same, so all we needed to do was divide the mission center's total costs by
the number of dialyses to get a cost per dialysis. However, in Destin Brass,
there are three distinct products that pass through the mission center, such
that the cost attachment effort is more complicated.
Second, it is quite easy to attach direct material and direct labor to any
given product. These can be computed at standard and are unambiguously
associated with each product. For example, the direct material cost of a
valve is $16.00 and the direct labor cost of a valve is $4.00.
Third, there are two kinds of indirect costs in any given mission center that
must be attached to the center's products: (a) costs that are direct for the
mission center but indirect with respect to any given product, it produces,
and (b) costs that have been allocated into the mission center from a
service center. n the Jefferson Multi-Media case, an example of the former
would be the administrative salaries in the division; these salaries are a
direct cost of the division, but indirect for any given product (such as a CD).
An example of the latter would be the rent and de- preciation cost that was
allocated into the division; this cost was indirect with respect to both the
division and any given product it makes.
Fourth, all of the above indirect costs go into overhead cost pools. To
attach them to products, we attempt to do two things: (a) make sure that
each pool consists of a relatively homogeneous collection of costs and (b)
find a unit of activity that causes (or drives) the use of those costscalled a
cost driver. As we saw in our discussion of Des- tin Brass, this can be quite
tricky. Let's now walk through the three systems that we saw at work in the
company.
System #1. This was a quite bad system in two respects: it had a
heterogeneous cost pool and a non-causal cost driver (direct labor dollars).
Nevertheless, it was quite easy to use. At the beginning of the year, the
company would prepare a budget for the entire manufacturing overhead
(MOH) cost pool. t also prepared a budget for total direct labor dollars, and
then divided the latter into the former to arrive at the rate: 439%. Then,
anytime it worked on a product, it simply multiplied the total direct labor
dollars by 439% in order to attach to the product its "fair share of MOH.
These computations were shown on the Excel spreadsheet that gave you.
System #2. This was a slight improvement in a couple of ways, but still
pretty weak. t had three cost pools, two of which were reasonably
homogeneous with improved cost drivers. However, it had a third cost pool
that was quite heterogeneous with a poor cost driver. With this system, at
the beginning of the year the company would pre- pare one budget for
receiving and handling materials, one for job setups, and a third for all else.
t then would di- vide the material cost pool by the budgeted direct material
dollars to arrive at an overhead rate per material dollar. t would divide the
setup pool by the budgeted number of setup hours to arrive at a setup rate
per hour. And it would divide the other cost pool by budgeted machine
hours to arrive at an overhead rate per machine hour.
Then, anytime it worked on a job, it multiplied the material cost by the
material overhead rate, the setup time by the setup rate, and the machine
hours by the machine hour rate. t added these three overhead costs to the
direct material and direct labor cost to determine total cost per product.
These computations were shown on the Excel spreadsheet.
As we discussed in class, the setup overhead was about as close to the
"bull's eye as possible. t was a ho- mogeneous cost pool, and its cost
driver was very causal. Overall, however, System 2 still had many flaws.
Material receiving and handling costs are caused by transactions rather
than the cost of the materials, for example, so while the cost pool was quite
homogeneous, the cost driver was non-causal. With the "other overhead
pool, we still had considerable heterogeneity, along with a cost driver that
was non-causal for some of the pool's components.
System #3. This is pretty good, although it might be tweaked a little. ts
workings also were shown on the Ex- cel spreadsheet. t has the following
strengths and limitations:
Material receiving and handling seems pretty close to the bull's eye, but
we cannot be entirely certain if the pool is homogeneous or it the driver (a
transaction) is causal.
Setup remains a bull' s eye.
Machine depreciation and maintenance seem pretty close to the bull's
eye. The pool is homogeneous and the driver (a machine hour) appears to
be quite causal. We might have some questions if there were different
machines for different products, which, if that were the case, we could
make some of these costs direct rather than indirect.
Engineering is pretty weak. We don't know much about the cost pool,
although it probably is pretty ho- mogeneous. The main problem is that a
work order can require only a few hours or many hours of engi- neering
time. Therefore, the cost driver is not as causal as we might like. f we
examined the records and found that all work orders required about the
same amount of engineering time, we might be satisfied, but, if that were
not the case, we probably should shift the driver to something like
engineering hours. Again, it might be possible to turn this into a direct cost.
Packing and shipping is maybe okay, but we don't really know. The cost
pool seems pretty homogene- ous, and a transaction is probably a pretty
good cost driver (unless different transactions require more or fewer hours
of packing and shipping work (as would be the case if we were packing and
shipping both pre-Colombian artifacts and pet rocks). f shipping is the
shipping cost rather than the work to do the shipping, then it could pretty
easily be made into a direct cost.
Therefore, we can conclude that we are getting closer to the bull's eye on
what it costs us to receive and handle the raw materials for a customer's
order, do any engineering work associated with the order, set up the
machines, operate the machines, and pack and ship the products to
complete the order. But, we still have some concerns.
iven all of this, the result is that the cost of a flow controller (where there
is little price resistance) has gone from $56.48 to $100.57. Pumps cost
much less to produce than we had thought (where there are downward
price pressures). Valves remain about the same.
t you now compute price so that there is a 35 percent margin for each
product (the company's goal), you would get quite different prices from
what they are now using. Valves would remain at about $58, but you could
further reduce the price of pumps to about $75, and you would want to
raise the price of flow controllers to about $155. However, whether your
flow control customers would tolerate a price increase of over 50 percent
on top of the 12 percent one you just made is an interesting question. The
market can't be totally price inelastic, so you would need to be careful.