Destin Brass Products Case Solution

Current situation analysis

       The current situation for Destin Brass Products is not very optimistic because their competitors have been reducing prices on pumps, which is their major product. With no unique design advantage, managers at Destin had seen no alternative except to match the reduced prices in order to keep their market shares. What is even worse is that the company’s profits in the latest month keeps dropping because their products are not competitive any more. The company has three main products, the valves, the flow controllers and the pumps. Pump business earns most of their profits and it also has most of the competitors who keeps on reducing the selling price. The managers from board are very confused about how can the competitors keep selling pumps at such a low price and it still be profitable for them. So they decided to find out why they are suffered from such a problem and finally they find out it is all about the cost accounting method they choose.

Alternatives analysis

       There are three different alternatives which can be used for the company to calculate the total cost for each unit they produced. They are the Standard unit costs method, the Revised unit costs method and the ABC method.

       The Standard unit costs method is the method they are currently used to calculate their gross margin level. It is built on measurements of direct and indirect costs and on assumptions about their production and sale activity. Each unit has three part of costs, material costs, labor costs and overhead cost. Both material cost and labor cost are directly calculated by the price we pay for the raw material or the labor time plus the labor earning per hour. The overhead cost is allocated depends on the production-run labor cost which equals total overhead/ total run labor and it is 439% for this case.

       Revised unit method based on a more modern way to allocate cost. Its set overhead cost into three specific parts and calculate them separately. They are the material related overhead, the set up labor and the other overhead which is based one machine hours each product used.

       ABC method or activity-based cost method is more accurate than other two methods. It delivers the direct material cost, direct labor cost and set-up labor cost in the same way just like other two. However, they distribute other overhead cost depends on different transactions they made and are caused by each products. From Exhibit1.3 we can calculate the total cost for each product is $37.76, $48.87 ad $100.57 respectively.

Recommendation

       Activity-based costing system (ABC) is the best option of the three alternatives for Destin Brass Products.

       Theoretically, the ABC system identifies the activities involved in the manufacture process then assigns the costs of resources to those activities. After measuring the amount of each activity consumed by different products, the company can assign the activity costs to those cost objectives, which help the company understand the actual overhead cost of each product. Compared with the standard unit cost and the revised unit cost, ABC can present the overhead cost consumed by each product directly. The company can know their manufacturing performance in each product so they can find the specific ways to improve their efficiency in manufacturing. Both the standard unit cost and the revised unit cost show the total cost of each activity and ignore the different consumption of each product. Considering the output and the production process are different, the total amount of each activity cannot reflect the actual overhead cost for each product accurately. Also, it is difficult for the company to adjust the manufacturing plan or make the new decision since they do not know the specific overhead cost consumption of each product.