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ELMAHIE ELSHIKH ELAJAB ELSHIKH MR08 1123

HAIDAR HABIB MUSTAFA MR08 1124

KAZIWA KADER KHALIDMR08 1142

SAFNIMARINA SAFIAN MR06 1029

For

MANAGERIAL ACCOUNTING MRB 1022

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1. Company’s Background

2. Company’s Effort

3. Identification of the current problems

4. Recommendations/solutions towards the problems

5. Conclusion

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Was established by Alpert, a retired United State Air Force in 1984.

TBM was located at California coast south San Diego.

Formed a partnership with Les Paul, a famous bronze boat fitting maker in California.

An accountant was assigned to the company to manage the accounts- Mary Ford.

They realize that manufacturing skills used in machining valves could be used in manufacturing pumps and flow controller.

So an engineering department were formed to design a new product.

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The valves, pumps and flow controller become their main products and contribute the company’s revenue.

Valves24%

Flow Controller

21%

Pumps55%

Company’s Percentage Revenue

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Products Revenue Standard Gross margin set at 35%

Components required

Sold to Other details

Valves 24% 35% 4 Single customer

upon completion

Pumps 55% 22% 5 7 industrial products

distributor

Flow Controller

21% 42% Similar like valves but

more components were needed

for each finished unit

22 distributors and some end-use

customers

Price raised to 12.5%

100%

Gross margin for Pumps had fallen below the company’s planned gross margin

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Valves PumpsFlow

Controller

Standard Unit Cost $37.56 $63.12 $56.60

Target Selling Price $57.78 $97.10 $86.96

Planning gross margin% 35% 35% 35%

Last month:Actual Selling priceActual gross margin

$57.7835%

$81.2622%

$97.0742%

What the company has done to capture the essence of global competitive advantage is they come up with the product profitability analysis.

From the table a statement concerning the competition in pumps versus flow controller a raised.

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Mary Ford

Q1: Product costs per unit Use the information in exhibit 2 to calculate the product costs per unit for valves, pumps and flow controllers that are reported in Exhibit 1.Show the calculation.

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Mary Ford

Q1: Product costs per unit Use the information in exhibit 2 to calculate the product costs per unit for valves, pumps and flow controllers that are reported in Exhibit 1.Show the calculation.

Direct labor = $16 LPH x run labor hours per unit

Which the direct labor is calculated based on the run labor

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Mary Ford

Q2: Estimation of Contribution Margins for the threeproductsWhat is your estimate of the current “contributionmargins” for the 3 products. Show your calculations andexplain them.

Which the direct labor is calculated based on the run labor

Contribution margin =Sales - Variable Cost

Valves Pumps

Flow

Controller

Revenue $57.78 $81.26 $97.07

Variable costs

(Materials only)16.00 20.00 22.00

Contribution Margin $41.78 $61.26 75.07

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Mary Ford

Q3: Revised Product CostsUse the information in Exhibit 2 to calculate the revisedproduct costs mentioned by Mary Ford on page 3.

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Mary Ford

Q3: Revised Product CostsUse the information in Exhibit 2 to calculate the revisedproduct costs mentioned by Mary Ford on page 3.

Valves PumpsFlow Controller

Materials $16.00 $20.00 $22.00

*Material Related Overhead 7.68 9.60 10.56

Setup Labor 0.02 0.05 0.48

Direct Labor 4.00 8.00 6.40

**Other Overhead 21.30 21.30 8.52

Revised Standard Cost $49.00 $58.95 $47.96

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Mary Ford

Q3: Revised Product CostsUse the information in Exhibit 2 to calculate the revisedproduct costs mentioned by Mary Ford on page 3.

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Mary Ford

Q3: Revised Product CostsUse the information in Exhibit 2 to calculate the revisedproduct costs mentioned by Mary Ford on page 3.

ProductsStandard

Cost

Revised

Standard Cost

Valves $37.56 $49.00

Pumps $63.12 $58.95

Flow

Controller$56.50 $47.96

Comparison between standard costs and revised standard cost of TBM

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Q4: Product Cost of the 3 products based on ABC approachUse the information in Exhibit 2 and 3 to calculate product costs for valves, pumps, and flow controllers under an “ABC” approach (Activity Based Costing)

Les Paul

Valves Pumps Flow Controller Total

Materials 120,000 250,000 88,000 458,000

Labor 30,000 100,000 25,600 155,600

Overhead:

Setup Labor 128 640 1,920 2,688

Receiving 600 3,800 15,600 20,000

Material Handling 6,000 38,000 156,000 200,000

Packing & Shipping 2,400 13,800 43,800 60,000

Engineering 20,000 30,000 50,000 100,000

Maintenance 10,500 17,400 2,100 30,000

Machine Depreciation 93,750 156,250 20,000 270,000

Total Overhead 133,378 259,890 289,420 682,688

Total Cost 37.78 48.79 100.76 1,296,288

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Q6: Comparison of Product Profitability under Three Costing SystemPrepare a table which compares product profitability across the 3 products under the 3 products costing systems. Which system do you favor and why?Les Paul

Valves PumpsFlow

Controller

Actual Selling Price $57.78 $81.26 $97.07

Standard Cost 37.56 63.12 56.50

Gross Margin 20.22 18.14 40.57

Gross Margin % 35% 22% 42%

Revised

Cost

49.00 58.95 47.96

Gross Margin 8.78 22.31 49.11

Gross Margin

% 15%

27% 51%

ABC Cost37.78 48.79 100.76

Gross Margin 20.00 32.47 -3.69

Gross Margin

% 35% 40% -4%

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Q7: Using "ABC" to Re-evaluate JIT purchasing policy for flow controllerUse the information in the ABC analysis to re-evaluate JIT purchasing policy regarding flow controllers. What is the conclusion? Herb Alpert

Calculate the lowers cost by:~$30.5 per unit ($122,000 / 4,000 units)

which yields a 28% gross margin at current prices! [(97-70) / 97 = 28%]

There seems no good logic for buying ten times per month,given the high cost of receiving and in-bound handling.

The basic ABC idea that receiving cost is driven by number ofreceipts, without regard to the number of items being handledwas considered.

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List of Problems Identified1. Traditional costing approach to Modern ABC approach2. JIT policy3. Product costing system

Looking back at the Planned Sales (assume volumes have not changed)calculation:

Valves (7,500 x 12 x $58) = $ 5.2 millionPumps (12,500 x 12 x $97) = 14.6 millionFlow Controllers (4,000 x 12 x $87) = 4.2 million

$24 million

Actual annual sales were only about $22 million at current prices. By assuming the profit plan at planned prices produced an adequate return on investment; the current situation is about 2 million of negative economic income.

They need to be earning about $2 million more profit per year, somehow!

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Mary Ford

Drop Flow Controllers?

Or Raise Selling Price?

Herb Alpert

What about the pumps?

Cost Reduction (Re-engineering) for Pumps?

Les Paul

How Are Valves Doing?

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Drop Flow Controllers?

As for the first option suggested to the management team, they can addingflow controllers to the product line (to use idle capacity?) or doubled themanufacturing complexity (4 or 5 components versus 10 components).But one thing that they might have to consider is, is this a reasonable thing todo in the factory?

ReasonIf flow controllers were dropped, how much short-run cost-savings could berealized? This question cannot be answered by ABC, which is not based on avariable cost and fixed cost dichotomy. For example, one half the engineeringcosts are subjectively assigned to flow controllers. But will $50,000 ofengineering cost be avoided if flow controllers were dropped?This does not change the conclusion that on a fully allocated basis, flowcontrollers have a negative gross margin, let alone providing any bottom lineprofit.

OPTION 1

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Or Raise Selling Price?

Given the "no-competition" market for flow controllers, perhaps the selling price could be increased gradually, but who knows? Who are the customers?

What do they want? How much will they pay?Given the uncertainty expressed by management in this market, there seems to be little harm in this pricing strategy, assuming management wishes to keep the product line after seeing the ABC results. But, one must note that the higher the selling price, the more likely TBM will see some competition and/or reduced demand.

And, if the purchasing policy is changed per Question 7, there is really no major problem at all with flow controller profitability.

OPTION 2

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What about the pumps?

The selling price for flow controllers increased more than 12% this past monthwhile the selling price for pumps decreased more than 16%.

The ABC analysis indicates that pumps still have the highest gross margin (40%)at the actual selling price. The gross margin would be 35% at a price of $75.06,which would allow still further price cuts of $6.20 per unit.

Given by the commodity pricing pressure on pumps and if 35% is really TBM'snecessary gross margin before SG&A expenses to earn an adequate rate ofreturn, then a further 5% decrease to approximately $75 can be made withoutharming the target gross margin. This assumes the ABC costs per unit do notchange.

OPTION 3

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Cost Reduction (Re-engineering) for Pumps?

There is a lot of buyer power in this market, so TBM must undertake costreduction and re-engineering programs to be the low cost producer. The casesays pumps require less precision manufacturing than valves. Pumps involveonly one more component than valves.

There are approximately 58 workers on board and average wage (plus benefits)is $16 per hour. At 25% benefits, an approximate wage rate is $13 per hour,which is on the high side for industrial manufacturing jobs along the Mexicanborder at the time of the case.

Perhaps less skilled machinists could be used on the pumps (and flowcontrollers)? Although automation is touted by management, direct laborrepresents 12% of the total manufacturing costs.Again, some cost savings may be possible.Also, eight hours for a set-up!

OPTION 4

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How Are Valves Doing?

Apparently, the one valve customer is pleased with their quality and competitive price. Competitors are not attempting price cuts. The case implies that automation and efficient production processes are helping control costs and efficiency. But is it good strategy for TBM to be dependent on a single customer for valves?

The ABC gross margin is 35% for valves so no action seems necessary to raise or lower prices.

A question for management: Is there no growth in this market? Evidently, thecompany makes pumps and flow controllers to fill out the production capacity.Can we really continue long-run with 24% of sales in a no-growth market with a single customer? And all of these options of recommendations can lead to the conclusion.

OPTION 5

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The conclusion is that the idea of JIT is always "good"- not whenreceiving and handling costs are as high as in this case. While theconcept of ABC is a dynamic concept based on cost management,where areas ABC is a static concept based on cost measurement.

OPTION 1

OPTION 2

OPTION 3

OPTION 4

OPTION 5

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• Based on the case study, the team had found out most of thequestions asked revolving around the ABC approach calculationwhich is approximately 50% of the overall content of the casestudy.

• While another 30% revolved around on how to determine thedecision making by using the ABM concept and other 10%respectively were on how to analyze the data generally and thecorrelation of team work to determine the solution for the casestudy.

30%

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