Cost Accounting

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In order to estimate product costs for valves, pumps, and flow controllers per unit, we need each product’s manufacturing overhead, plus material, total labor cost and machine depreciation. First of all, we calculate manufacturing overhead for each product line by assigning each category according to the weight. For example, in receiving department, valves have 3%, pumps have 19%, and flow controllers have 78%, so we use the total receiving cost of $20000 to come up to the receiving cost for each of the product, and we get $600, $3800, and $15600. We repeat this process in materials handling, engineering, packaging and shipping, and maintenance department for each product to get the total manufacturing overhead for each product line. Then we list material cost for each product according to monthly product and cost summary exhibit. Labor cost in Destin Brass Products Co. has been divided into two parts, set-up labor and run labor, both based on $16 per hour rate. In calculating the set-up labor, we use production run times for each product line times hours needed in each run, then divide it by the total production for the product. For the run labor, we simply use hours needed for each unit times the labor hour rate. And for the last part of the cost per unit, machine depreciation, we use machines usage for each product line times the machine depreciation rate, which is $25 per hour. At last, we add all the cost up to get the total cost per unit.

To summarize for the following comparison analysis, Under-costed products will be underpriced and may even lead to sales that actually result in losses because the sales may bring in less revenue than the cost of resources they use. Over-costed products will lead to overpricing, causing those products to lose market share to competitors producing similar products.

 Traditional Cost System

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 Activity Based System                          $37.70        $48.79           $100.76

For the traditional cost accounting system, it only includes material, direct labor, and manufacturing overhead. For the manufacturing overhead, all products consume the same overhead rate of 439% in the same proportion. So the difficulty with using the traditional cost accounting system is some products require more and some require less transactions. Therefore, the traditional cost system does not take into account the fact that most of manufacturing overhead (receiving of 78%, handling of 78%, and packing and shipping of 73%) goes into flow controllers. After comparing the cost for the two systems, it is clearly to find that traditional system causes pumps to be more expensive and flow controllers to be less expensive. Therefore, the sales price of pumps are too high and flow controllers are too low, which causes Destin to be strategically non-competitive.