Camelback Communications Case

Problem:

Camelback Communications was profitable, but there was concern about its ability to appropriately cost its products. It was determined production processes weren’t the problem, so it was determined that accurate pricing was the issue. A consultant was brought in to analyze the firm’s cost accounting system. A single burden rate based on budgeted direct labor hours was being used to allocate fixed and variable overhead to each product. The burden rate was the cause of the distorted product cost.

Executive Summary:

Analyzing the consultant’s four product model, it becomes clear that the cost accounting system is to blame for inaccurate pricing. The current system is faulty because it calculates the allocation rate by adding together all the fixed and variable costs for all four products and dividing them by the total labor hours. This is inaccurate because fixed overhead doesn’t change respective of labor hours. Then it is being divided between all four products because it is included in the allocation rate. Additionally, the variable overhead used in the current method is inaccurate because variable overhead is different for each product.

Analysis:

Consider this table:

Product Combined Product A Product B Product C Product D

Variable Overhead $35,000 15,000 7,500 5,000 7,500

Fixed

Overhead 45,000 10,000 10,000 12,500 12,500

Total 80,000 25,000 17,500 17,500 20,000

Labor Hours 12,000 6,000 1,000 3,000 2,000

Allocations/Hour $6.67 $4.17 $17.50 $5.83 $10.00

It is clear that Product A’s allocation is