This case study illustrates motivation and design for an activity-based cost system. Students estimate the new cost model, which provides a different perspective on product line profitability. Students are required to suggest actions, based on the new cost model, to improve the company’s profitability.
1.Identify and analyse ethical and organisational issues confronting contemporary management accountants.
2.Categorise and identify the nature of various types of costs, cost objects and cost behaviours and use cost estimation techniques to develop cost functions.
3.Apply cost accounting techniques to calculate the cost of a range of cost objects, as well as analyse costs.
4.Apply cost information to planning, control and decision-making.
5.Critically evaluate the relevance of both quantitative and qualitative costing information to management decision making
Destin Brass Products Case Study Questions
1. Explain the three possible ways of cost allocation discussed in this case study.
2. Develop activity-based costs for valves, pumps and flow controllers. Use the information provided in Exhibit 5 and the description of the activity-based costing system provided in the case.
3. Compare the estimated unit costs under the activity-based costing system (calculated in requirement 2) to existing standard unit costs (Exhibit 3) and the revised unit costs (Exhibit
4). What causes different product costing methods to produce such different results?
4. Destin Brass is experiencing price pressure in the pump market, but the company can increase the price of the flow controllers without inviting competition. What are some of the possible reasons for the actions of competitors? Provide an answer based on your understanding of the company’s activity-based costing system. 5. Discuss the strategic implications of your ABC analysis. You may consider the following factors in your answer.
• Could the production process for flow controllers be changed in such a way to allow Destin Brass Products to reduce the unit cost of flow controllers? How?
• How would the change in the lot size for the flow controller production affect unit cost?
• Has Destin Brass Products adopted the most profitable distribution system in the flow controller market? What actions would you recommend to managers at Destin Brass Products Company?
6. Assume that interest in a new basis of cost accounting at Destin Brass Products remains high. In the following month, quantities produced and sold, activities and costs were all at standard. How much higher or lower would the net income reported under the activitytransaction-based system be than the net income that will be reported under the present, more traditional system? Why?
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