PLEASE AS SOON AS POSSIBLE AND STEP FOR STEP SOLUTION Tankmaster Manufacturing Company is a large manufacturer of domest

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PLEASE AS SOON AS POSSIBLE AND STEP FOR STEP SOLUTION
Tankmaster Manufacturing Company is a large manufacturer of
domestic oil tanks. Since it came into existence in 1980, the
company has enjoyed steady growth in both sales and profits.
Davina Tankmaster, the founder's daughter, joined the company in
2010 after graduating with a degree in Accounting and Finance from
Manchester University. One of her first tasks was to revise the
costing system, as there was a need for more accurate product cost
information to support the company's strategy of offering keen
prices in a highly competitive market dominated by a few large
firms.
Davina had faced considerable opposition to the changes she had
suggested, with several managers being willing to accept the
shortcoming of the old system because they had 'learned to live
with it'. Davina won the day largely because of her father's
support as the latter was convinced that 'learned to live with' was
a euphemism for learned to manipulate to our own advantage'.
Davina's father has now retired so that Davina is now conscious
of the need to prove herself. Accordingly, the last thing she wants
at present is the upset of another major change in the costing
system. However, profits are below budget and the accounting is
critical of the current costing system, saying that it is
hopelessly out of line with the company's updated manufacturing
methods and also with current theories on product costing. He says,
'We are still absorbing overheads on labor-hours and we have an
absurdly high overhead absorption rate of €150 per labor-hour. We
are pricing ourselves out of the market on our old established
products. Product costs would be more meaningful if we absorbed
overheads on machine-hours.
Davina decides she must investigate. Over the past five years,
overhead costs had risen to €599,300 per month, a 46% increase,
while direct labor-hours have risen from €168,200 to €170,000, a
negligible amount. The product processes are now largely mechanized
with a relatively high level of automation. Direct labor-hours are
4000 compared with machine-hours of 6500 (it is possible that some
labor is still being classed as direct when in fact changes in
technology have altered its nature to indirect).
Davina asks the production manager about the rise in overhead
costs, causing him to virtually explode: "How can I keep costs down
when marketing ignores our standards specifications and insists on
23 different versions of every product? I need more specialist
engineers to monitor the changes, and they don't come cheap. Also,
there are completely new parts coming through from design with huge
material costs; materials handling is a real headache. And the
number of speciais going through on small production runs continues
to increase. I need many more set-ups per shift and that is skilled
work, but you can't pick up that sort of skilled labor easily, so
overtime is through the roof.
Davina talks to the marketing manager next: 'We are facing
fierce competition for our bread-and- butter, high-volume lines and
we just can't match the low prices in the market. However, we have
successfully increased our sales of the more specialized tanks
despite an increase in prices forced on us by production. So, we
are meeting our overall sales targets and as we encourage this
trend towards the higher margin specialist products, our profits
will rise. I don't see any problem here at present, but there will
be if you don't make production get control of the cost increases.
word English (United States
Davina starts to pull the information together and gets
frustrated at the inconsistencies: 'We are meeting our sales
targets, but production costs are rising because of the switch to
specialist products. However, as these are sold at higher margins,
we should be improving profits. I don't understand why profits are
falling.
As Davina designed the costing system, she is reluctant to admit
that it is at fault and she clearly remembers the opposition she
had when she last recommended changes. She no longer has her father
to support her so that she decides to bring in a consultant (you)
to help identify the problem and to advise on the necessary changes
and on a suitable implementation policy. Davina supplies you with
the following information:
Budgeted Overhead Costs per month (in
€):
Machines 279,500
Set-up and engineering support Total manufacturing cost
excluding direct materials
200,200
Materials handling 119,600
Total overhead 599,300
Direct labor 170,000
Total manufacturing cost exluding direct
materials 769,300
Further details:
Budgeted labor rate €42.500 / labor-hour
Budgeted overhead burden €149.825/labor-hour
Total cost per labor-hour €192.325
* Based on budgeted direct laber-hours of 4000.
labor-hour
Machine-hours
No. of set-ups
No. of stores orders
Standard products (high volume)
2500
3500
80
160
Specialized products (low volume)
1500
3000
200
300
Total
4000
6500
280
460
Total Required:
1. Analyse the problem and give advice as to the advantages of
switching from labor-hours to machine-hours as the overhead
recovery base.
2. Show how an ABC system would change the analysis of the costs
between, the standard and specialist products.
3. What are the management implications of the ABC analysis?
What actions might Davina take to improve the company's
profitability?
4. What are the potential problems with the implementation of
the ABC system. How can Davina's fears be allayed?