Good-Crack Company (gcc) Inc - Case Study - Bat Division

The “Good-Crack” Company (GCC) Inc.

ACC 330: Case Assignment – Part 1

With the addition of the Pro Series line in the Bat division of the “Good-Crack” Company, implementation of the ABC system of cost accounting is a valuable tool providing more precise tracking of production costs of both lines of bats produced. The previous system of allocation of costs based on direct manufacturing labor hours alone may have been acceptable for a single line or single product production facility because with the single line, no additional machine set-up time was required. However, with the introduction of the Pro Series line, allocation of manufacturing overhead costs solely based on direct manufacturing labor hours did not provide the information necessary to address additional machine set-up required for this higher line series. Through addition of the tracking and analysis of a second cost driver – set-up labor hours – management is provided necessary information to make better decisions regarding the most advantageous product mix and helps to track the costs of each activity to provide more product specific information.  The previous costing system, were it still to be used, could not provide accurate and relevant information on the separate products or their related activities, machine set-up and manufacturing, and provided limited information on whether the products were profitable or needed sales price adjustments.  

The implemented ABC system tracks the cost drivers of direct manufacturing hours and machine set-up for the manufacturing of each of the two products.  Calculation of the variable and fixed costs for manufacturing overhead is based on direct manufacturing labor hours and calculation of machine set-up overhead is based on set-up labor hours. The direct variable costs for each consists of supplies, indirect manufacturing labor, power, and maintenance and the fixed manufacturing and machine set-up costs are depreciation, supervision, and power.  Manufacturing operations overhead fixed costs also include maintenance.  The two product lines consisting of the Entry-level Bat and the Pro-series Bat are produced in batches. As seen below, the Entry-level bat is using five hours of setup labor hours to produce a batch of one hundred bats and the Pro-series uses eight hours to produce a batch of twenty bats.  Based on budgeted 2015 factors, one direct labor hour is allocated per bat for each Entry-level bat, whereas, two hours are allocated to each Pro-series bat.  GCC maintains an ending inventory of twenty percent of the next year’s sales level for the Entry-level Bat and no ending inventory is maintained for the Pro-series Bat since this line is a custom-made product and not produced until ordered.

The Pro-series bat has the highest cost per unit for manufacturing and because it is a custom made bat, it has a longer setup time of eight hours and runs twenty bats in a batch.  The cost per labor hour is based on total production of nine-thousand, five hundred units.  This production level requires four hundred, seventy-five batches at twenty bats per batch. In light of this, GCC may want to look at use of another cost driver based on per batch run.  This would assist in providing information on cost per batch and unit produced per batch.  Additionally, another cost driver to be considered would be waste per product line.  Although unavoidable in production of bats, waste is still an important factor of production affecting costs and with a product such as bats that requires precise measurements, waste can be a large factor.  This is especially true of the Pro-series line where the bats are made to specifications set by the customer.  Consideration must be given to the bats that fall outside of specifications and measurement implemented to calculate how that waste affects overall production cost. Such information would prove valuable both to the sales team and to the production team allowing maximization of material and production time. Based on these costs at a production level of 9,500 units and a projected production level of 9,975 units waste cost of only 1% could run from $7,220 to $8,600 for 2016.  Waste costs for the Entry-level bat could run from $19,250 to $20,700.