Members of Group 8.

0
Elmahie Elshikh Elajab Elshikh MR08 1123
Haidar Habib Mustafa MR08 1124
Kaziwa Kader KhalidMR08 1142
Safnimarina Safian MR06 1029

Tijuana Bronze Machining

Group Case Study

As time goes by, it becomes clear to me that our competitions are crazy. Pumps are a
major product in a big market for all of us, but with the prevailing price cutting mentality
no one will be to sell pumps profitably as long as we all are forced to match each others’
lower prices. I guess we should be grateful that competitors don’t play the same foolish
game in valves and flow controllers. Even with the 12 ½% price increases, we don’t see
any new competition in flow controllers.

-Herb Alpert, President

 T ABLE OF C ONTENTS
List of Figures
Figure 1.0: TBM revenue based on the products ...................................................5
Figure 2.0: Percentage of conclusion derived from the case study .......................... 21

List of Tables
Table 1.0: TBM performance ...............................................................................6
Table 2.0: TBM Product Profitability Analysis ........................................................7
Table 3.0: Product cost for valves, pumps and flow controller .................................8
Table 4.0: Contribution margin for valves, pumps and flow controller .......................9
Table 5.0: Revised product costs ....................................................................... 10
Table 6.0: Comparison between standard costs and revised standard cost of TBM ... 11
Table 7.0: Product cost based on ABC approach ................................................. 12
Table 8.0: Product Profitability under 3 products costing system ........................... 13

1.0 Introduction ............................................................................................ 2

Background ......................................................................................................3

2.0 Performance ............................................................................................ 5

Company’s Effort ...............................................................................................7
Calculation Report Analysis
1.0 Product cost per unit ............................................................................8
2.0 Estimation of contribution margins for 3 products ....................................9
3.0 Revised Product Costs ....................................................................... 10
4.0 Product Costs of 3 products based on ABC approach .............................. 12
5.0 Comparison of reported income between 2 methods .............................. 13
6.0 Comparison of product profitability under 3 costing system .................... 13
7.0 Using ABC to re-evaluate JIT purchasing policy for flow controller ........... 14

3.0 Identification of Problems ..................................................................... 16

4.0 Recommendations ................................................................................. 17
Option 1: Drop Flow Controllers? ....................................................................... 17
Option 2: Or Raise Selling Price? ...................................................................... 18
Option 3: What about the pumps? ..................................................................... 18
Option 4: Reduction (Re-engineering) for Pumps? ....................................... 18
Option 5: How Are Valves Doing? ..................................................................... 19
5.0 Conclusion ............................................................................................. 20
References................................................................................................... 22
Appendix ..................................................................................................... 23
The calculation part ........................................................................................ 24
Group Action Project ........................................................................................ 30

Managerial Accounting Group 8.0 | 1

1 This case is designed to familiarize with
Introduction
Tijuana Bronze Machining is basic case
Activity-Based Costing (ABC) and
Activity-Based Management (ABM).
There is enough richness to the fact.
Situation to create non-trivial
calculations is rich enough to support
good discussion on the managerial
implications.
the behavioral and technical variables
that can aid or impede successful ABC
implementation.
In this case, the casting role of a
business consultant was used to
synthesize the case study's key
"change management" insights into a
report that could be shared with co-
workers in an intranet-based knowledge
management system.
Implementing change in an organization
is about ninety percent (90%)
cultural and ten percent (10%)
technical. This is because the
organization dynamics, politics, and
search for a champion that go on are
the real issues that make or break the
project. One of the reasons to be able to
implement ABC successfully was
because the right people became
champions.

Managerial Accounting Group 8.0 | 2

Background
Tijuana Bronze Machining (TBM) was
established by Alpert in 1984 when
he purchased a moribund commercial
machine shop on the California coast
south of San Diego. He had sensed
an opportunity in a conversation with
the president of a large manufacturer
of water purification equipment who
was dissatisfied with the quality
bronze valves available.
He formed a partnership with les
Paul, locally famous for the high-
quality bronze boat fittings he
manufactured for fleet along the
Southern California and Baja coast.
Alpert had recently retired from the
United States Air Force, where he
had a long record of administrative
successes. The two then selected
Mary Ford, an accounting with
manufacturing experience, to join
them.
Paul was quick to analyze the nature
of problems other manufactures were
having with water purification valves.
Since the tolerances needed were
small, maintaining them required
great labor skill and expensive
machine controls.
Managerial Accounting Group 8.0 |
Within weeks of forming the company,
Paul and his shop crew were
manufacturing valves that met or
exceeded the needed specifications.
Alpert negotiated a contract with one
purification equipment manufacturer,
and revenues soon were earned.
Tijuana Bronze Manufacturing is a
producer of valves, pumps, and flow
controllers. Alpert, who had a long
record of administrative successes,
back in 1984, established it. He
partnered with Les Paul, a high quality
bronze boat fittings manufacturer and
Mary Ford, an accountant with
manufacturing experience.
Since tolerances for water purification
are small, maintaining them required
great labor skill and expensive
machine controls. From the start,
Alpert either met or exceeded
customers’ specifications. Shortly
after, TBM created an engineering
department and designed new
products knowing that the same
manufacturing skills used in creating
machine valves could also be used in
manufacturing pumps and flow
controllers, since the valves alone did
not utilize TBM’s full available capacity.
The same equipment and labor were
used for all three-product lines and
runs were scheduled to match
customer-shipping requirements to
eliminate finished goods inventory.
Their raw materials suppliers also
agreed to use just-in-time deliveries
and products were packed and shipped
as completed.
3
Regarding their products, valves there was no effect on demand.
composed 24% of the company’s Management is discussing possible
revenues and were created from four changes in their operations: for
bronze components. Paul had example, how to allocate overhead to
designed the machines that held each products. They are unsure whether
component while it was machined they should continue to use traditional
automatically. Precise machining was cost accounting or activity based
too expensive to compete in a costing. One choice would be to
nonspecialized valve market and all forego the overhead cost allocation
monthly production of nonspecialized altogether and instead charge it off as
valve market took place in a single a period expense. For overhead costs
production run, right before it was that could not be traced directly to
shipped to each customer upon product lines, the other choice was to
completion. Paul felt competitors allocate on the basis of transactions.
could match quality, but none had Both have their advantages and their
tried to gain market share by cutting disadvantages and they needed to
price. Gross margins amounted to weigh out both.
35%. They decided to experiment with
Pumps made up 55% of the estimates to see how the product costs
revenues and manufacturing processes might be affected. They began with
were similar to valves but a lot less discussing transactions and efforts
intricate. The pumps were sold related to each type of overhead cost.
through seven distributors and orders They then created an analysis
were stable as long as TBM matched
competitive prices. The company
scheduled five production runs each
month. Prices were under pressure
since the market was large and
specifications were less exact.
Because there was no design
advantage, it had no choice but to
match lower prices or give up its
market share. Margins had fallen from
a planned 35% to 22%.
Lastly, flow controllers created
21% of revenues. More components
were needed for each finished unit,
but less labor was required. The
product was added to the line because
it helped fill excess machining
capacity. They are distributed in 22
shipments to distributors and
customers. There is almost no
competition in this market and even
when prices were raised 12.5%,

Managerial Accounting Group 8.0 | 4

2 As for the pumps, although the
manufacturing process is similar to
valves only with a little less precision,
the prices to distributors had been
under considerable pressure. The gross
margin for pumps had fallen below the
company’s planned gross margin by
Performance 22% with revenue of 55%. One of the
To analyze the situation of Tijuana reason lead to this down turn is that the
Bronze Machining, the past company had no design advantage in
performance was taken pumps. So in order to survive they had
consideration. The valves, pumps to match the lower prices or give up its
and flow controller become their market share.
main products and contribute the
company’s revenue as follows. The flow controller had regulated the
rate and direction of the flow of liquids
Valves
by 42% gross margin up away from the
Pumps
24% standard gross margin setup with 21%
55% of revenue. This product was added to
help fill the excess machining capacity.
The company identified that this product
had a good market as the flow
controllers had almost no competition in
the market compared to other two
Flow products. With that performance the
Controller flow controller prices was raised by
21%
12.5% with no apparent effect on
demands. The details of the
Figure 1.0: TBM revenue based on the performance are depicted in the table
products
1.0.

The standard gross margin has been

setup by 35%. From the standard
percentage, the valves have been
maintained at the standard with
revenue of 24%. So this means that
their expense for the machining made
is successful although the TBM’s
valves are too expensive to compete in
the nonspecialized valves market. No
competitors could match TBM’s quality
in valves as the result of none of the
competitors tried to gain the market
share by cutting the price.

Managerial Accounting Group 8.0 | 5

 Table 1.0: TBM performance
(Using standard gross margin as the benchmark)

Managerial Accounting Group 8.0 | 6

Company’s Effort
As an effort of Tijuana Bronze
Machining (TBM) company based on
their performance, what they had
done so far can be depicted in the
answers of each questions provided.
To begin with the product profitability
analysis is created to identify the
potential problems they are facing.
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.

Table 2.0: TBM Product Profitability Analysis

Managerial Accounting Group 8.0 | 7

Calculation Report Analysis
As an effort to solve the problems of Tijuana Bronze Machining facing, the
calculation answers were made to analyze the options.

1.0 Product Costs per unit for valves, pumps and flow controllers

Based on Exhibit 2 information, the calculation or workflows of the calculation

derivation are shown below:

Valves Pumps Flow Controller

Materials $16.00 $20.00 $22.00
Direct Labor based on run labor 4.00 8.00 6.40
*Manufacturing overhead 17.56 35.12 28.10
Total Standard cost $37.56 $63.12 $56.50

Table 3.0: Product cost for valves, pumps and flow controller

The Overhead calculation are as follows:

Machine depreciation $ 270,000
Set up labor $ 2,688
Receiving $ 20,000
Materials Handling $ 200,000
Engineering $ 100,000
Package Shipping $ 60,000
Maintenance $ 30,000
Total $ 682,688

Total run labor

= 9725 hrs x $16
= $155,600

Overhead rate
= $682,688
$155,600
= 4.387455013 or 439%

* Manufacturing overhead = 439% x direct labor

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

Managerial Accounting Group 8.0 | 8

In Exhibit 2, the measurements are built based on the direct and indirect costs and
on assumptions about the production and sales activity. Each unit of the product is
charged for material cost based on the prices that the company’s pay for
components, and for labor cost based on the standard run labor times priced at
$16 per hour. Based on the price of direct labor $16 labor per hour times with the
labor hours per unit for each product, the manufacturing overhead costs for each
product can de derived by multiplying the overhead rate (439%) with direct labor
cost. With that calculation it shows how the amount stated in Exhibit 1 derived. For
Valves the standard unit cost is $37.56, pumps %63.12 and flow controllers are
$56.50.

2.0 Estimation of Contribution Margins for the three products

To estimate the contribution margins for the three products, the contribution
margin principle is used.

Contribution margin =Sales - Variable Cost

Taking the information from Mary Ford’s conversation, the product profitability will
be measured at the contribution margin level, which is price less all variable costs.
While the situation, only the short run variable cost is direct material.

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

Table 4.0: Contribution margin for valves, pumps and flow controller

After calculate the contribution margin, the Flow controller shows the most
contribution margin with $75.07 compare to valves and pumps are $41.78 and
$61.26 respectively.
But the amount of the contribution margin should not disregard the overhead cost
as because the marginal customers that willing to pay marginal prices are based
on marginal costs. From the outset, they have succeeded in part because they
insisted on trying to maintain the 35% gross margin including allocated
manufacturing overhead. So in order to try the modern view of the proper way to
allocate the cost question 3 leads to the revised product costs mentioned by Mary
Ford.

Managerial Accounting Group 8.0 | 9

3.0 Revised Product Costs

Based on the information in Exhibit 2, the revised product unit cost per “More
Modern View”

Valves Pumps Flow 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

Table 5.0: Revised product costs

The significant of the calculation was first to identify the material related overhead
(the cost of receiving and handling material) and allocated that to each product
line based on the cost of material.

*Material Related Overhead

Receiving $20,000
Material Handling $200,000
Total $220,000

Overhead Allocation rate on Materials Cost = $220,000

$458,000
= 0.480 or 48%

So material overhead
for the 3 products = 48% x Material Cost

The related overhead for the material of valves, pumps and flow controller are
$7.68, $9.60 and $10.56 respectively.
To calculate the revised standard cost, the other overhead is derived by calculating
the overhead allocation rate times the machine hours. This can be depicted in the
work flow below. To get the revised standard cost, the total up of materials,
material related overhead, setup labor, direct labor and other overhead is sum up.

Managerial Accounting Group 8.0 | 10

 **Other Overhead on Machine Hour Basis

Machines
Depreciation $ 270,000
Engineering $ 100,000
Packing and
$ 60,000
Shipping
Maintenance $ 30,000
Total $ 460,000

Overhead Allocation Rate= $460,000.00

10,800 hrs
= $42.59 machine per hour

To calculate other overhead = $42.59 x Machine Hours

After the calculation, the revised standard cost for valves is $49.00, while pumps
are $58.95 and Flow controller is $47.96.The comparison calculation is depicted in
the table 6.0 below. The result of this revision made sense to the reason why the
competitors are chasing lower prices in the pump market. The revised standard
cost for pumps is more than $4.00 below the present standard and would show a
gross margin percentage of 27% compared to the current 22%.

Revised Standard
Products Standard Cost
Cost
Valves $37.56 $49.00
Pumps $63.12 $58.95
Flow Controller $56.50 $47.96

Table 6.0: Comparison between standard costs

and revised standard cost of TBM

Managerial Accounting Group 8.0 | 11

4.0 Product Cost of the 3 products based on ABC approach

Based on the Exhibit 2 and Exhibit 3 information, the product costs for valves,
pumps and flow controllers is calculated using the “ABC” approach (Activity
Based Costing) as follows:

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

Table 7.0: Product cost based on ABC approach

From table 7.0, it shows that using Activity Based Costing (ABC) the valves total
cost is $37.78, while a pump is $48.79 and the flow controller is $100.76. Based
from the ABC approach the cost can identify the costs pools, or activity centers
in the company and assigns the costs to products and services (cost drivers)
based on the number of transactions involve in the process of providing a
product. It is to be viewed to maximize shareholder value and improve the
company’s performance.

With the costing based on activities some advantages for the company is
identified:

 Accurately predict costs, profits and resource requirements associated with changes
in production volumes, organizational structure and resource costs.
 Easily identify the root causes of poor financial performance.
 Track costs of activities and work processes.
 Equip managers with cost intelligence to drive improvements.
 Achieve better Positioning of products

From table 7.0 too, the company detect that the flow controller product cost
much more compared to the standard cost and the range of high or lower
amount is calculated for the following month, when the quantities produced and
sold, activities and costs were all standard.

Managerial Accounting Group 8.0 | 12

5.0 Comparisons of Reported Income between the Two Methods

After made a comparison between the two systems, there will be no difference.
Each month reflects two different methods of assigning the same actual costs to
the three products. The total results for the company will be identical.

6.0 Comparison of Product Profitability under Three Costing System

Valves Pumps Flow 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 27% 51%
% 15%

ABC Cost
37.78 48.79 100.76
Gross Margin 20.00 32.47 -3.69
Gross Margin
% 35% 40% -4%

Table 8.0: Product Profitability under 3 products costing system

The total reported results are the same for the company under the three
methods. The accounting allocations for individual product lines change the gross
margins significantly. Product line profitability changes most significantly for
flow controllers under ABC, dropping from the highest gross margin product to a
loser. Given the "complexity" reflected in Exhibit 3 for flow controllers, the
activity/transactions costing system bears out the higher proportion of costs.
Therefore it is "better" than other systems. Also, although there could be
differences in some cost allocations such as engineering and maintenance, 100%
of the costs are allocated on a reasonable resource consumption basis using
ABC.

Managerial Accounting Group 8.0 | 13

7.0 Using "ABC" to Re-evaluate JIT purchasing policy for flow controller

According to the case study, Flow Controllers require ten components for each of
ten runs per month for a total of 100 receipts and 200 material handling
transactions under the JIT arrangement with suppliers.
The total cost of both receiving and material handling is $220,000 ($20,000
receiving and $200,000 material handling).
Receiving and inbound handling is $140,000 of this total
($20,000 + 0.6 x $200,000)

Under a "just-in-case" or JIC practice where all components for a month's Flow
Controller production will be purchased together, the total receiving and material
handling costs will be only $14,000 (1/10 the cost). Some assumptions will be
necessary for calculating inventory storage and carrying cost charge. The total
cost of flow controller components purchased each month is $88,000. Assume
uniform production during the month so that the average inventory cost is
$44,000 (50% x $88,000). Assume carry costs are 100% per year, including a
capital charge for space, space costs (maintenance, etc.), handling costs (labor,
etc.), carrying costs (insurance, taxes, etc.), and cost of funds. Applying a
monthly carrying cost rate of 8.5% (100% / 12 months), the monthly storage
and carrying cost is $3,740 (.085 x $44,000). With a lower overall carry cost
percentage, this number is even lower.

Looking back at the calculation the company found out that:

Just-in-Time Costs: $140,000

Just-in-Case Costs:
Receiving & material handling $14,000
Carrying cost~4,000 18,000
Net savings per month using "JIC" 122,000

If TBM can reduce the receiving and in-bound material handling costs, there is a
potential net savings of almost $1.5 million per year ($122,000 for 12 months)
by using monthly purchasing, versus JIT.

If we assume the $140,000 total costs are fixed, then there are no savings. But,
if all costs are totally fixed, who cares about any allocation scheme anyway?

"JIC" for Flow Controller Purchasing?

This alone 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%].

Managerial Accounting Group 8.0 | 14

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 of receipts, without
regard to the number of items being handled was considered.
This is because, for valves, one receipt is 7,500 items. For flow controllers, one
receipt is about 400 items.
The question of what is the nature of the process such that one transaction of
7,500 items costs the same to process as one transaction of 400 items has been
debatable.

Managerial Accounting Group 8.0 | 15


3 of price machining to make valves too
Identification of
Problems
Referring to the company’s data and the
conversation, their expenditure is very
high and getting less profits. The
company makes three products: Valves,
Pumps and Flow Controllers.
Managerial Accounting Group 8.0 |
Valves
It seems the company has no problem
with Valves, even though the expense
expensive but the merit for TBM’s
company is that the competitors don’t
use cutting price strategy for valves.
After allocating ABC it will be clear that
the company doesn’t need to change
their strategy for valves.
Pumps
Pumps are a major product in a big
market; there are many rivals for this
product competing in the market.
Cutting price by the competitors forced
TBM to cut pumps selling price in the
market, but in the same time the
expense for pumps is high. The profit
cannot be seen if the company cuts its
selling price as much as the competitors
do. The company’s planned gross
margin for pumps is 35% but the actual
gross margin had fallen to 22% way to
far from the standard margin.
Flow controllers
Even though TBM has added Flow
controllers to use idle capacity, but the
expenses for this product is very high it
is more obvious when we allocate ABC
system. It ensures that the company
makes losses on selling Flow controllers.
16
4
Recommendations
The recommendations that can be suggested to the management were stated by
looking at how well the company’s doing.

How are they doing?

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

Valves (7,500 x 12 x $58) = $ 5.2 million

Pumps (12,500 x 12 x $97) = 14.6 million
Flow 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!

OPTION 1: Drop Flow Controllers?

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

Reason
If flow controllers were dropped, how much short-run cost-savings could be
realized? This question cannot be answered by ABC, which is not based on a
variable cost and fixed cost dichotomy. For example, one half the engineering
costs are subjectively assigned to flow controllers. But will $50,000 of engineering
cost be avoided if flow controllers were dropped?
This does not change the conclusion that on a fully allocated basis, flow controllers
have a negative gross margin, let alone providing any bottom line profit.

Managerial Accounting Group 8.0 | 17

OPTION 2: 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 3: What about the pumps?

The selling price for flow controllers increased more than 12% this past month
while 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's
necessary gross margin before SG&A expenses to earn an adequate rate of
return, then a further 5% decrease to approximately $75 can be made without
harming the target gross margin. This assumes the ABC costs per unit do not
change.

OPTION 4: Cost Reduction (Re-engineering) for Pumps?

There is a lot of buyer power in this market, so TBM must undertake cost
reduction and re-engineering programs to be the low cost producer. The case
says pumps require less precision manufacturing than valves. Pumps involve
only 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 Mexican
border at the time of the case.

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

Managerial Accounting Group 8.0 | 18

OPTION 5: 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, the

company 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.

Managerial Accounting Group 8.0 | 19

 Based on the recommendations
provided to the management team, the

5 ABC concept can be applied accordingly

in certain situation. For option 1, they
should consider the impact of dropping
the flow controllers, as the flow
controller are much related with the
option 2 of raising the selling price. If
the purchasing policy is changed per
Conclusion Question 7, there is really no major
problem at all with flow controller
The conclusion is that the idea of JIT is
profitability.
always "good"- not when receiving and
handling costs are as high as in this
While option 3 gives the company an
case. While the concept of ABC is a
opportunity to implement the ABC
dynamic concept based on cost
concept as the ABC analysis indicates
management, where areas ABC is a
that pumps still have the highest gross
static concept based on cost
margin (40%) at the actual selling
measurement.
price. Then a decrease 5% in cannot
harm the target gross margin. This
assumes the ABC costs per unit do not
change.

As for option 4, they should consider to

do re-engineering or cost reduction to
the pumps. As per reasons mention in
the recommendation of option 4 they
can not only save the cost of the setup
but also they can lure the buyer power
in the market.

To go on for the option 5 on the valves,

it is thinkable as the ABC gross margin
is 35% for valves so no action seems
necessary to raise or lower prices.
This option strategy is on the growth of
the market. Because evidently, the
company makes pumps and flow
controllers to fill out the production
capacity.

Managerial Accounting Group 8.0 | 20

As a whole conclusion, this project work was on ABC calculation and the ABM
managerial implications. it designed to augment managerial and cost accounting
study, while the case situation develops the ability to apply cost analysis to
decision-making situations. Thoroughly tested and proven highly effective, the
cases provide challenging and fun problems that help build skills with managerial
and cost accounting techniques. Based on real-life scenarios, the cases give the
opportunity to analyze the situation, decide which accounting concept is most
appropriate, and apply the concept as the manager of a firm.

As a result here is the general conclusion on what the team gets in the end of
this case study:

10% Calculation- ABC

implication
30% Analysis of data
50%
10% Decision making-ABM
concept
Team work

Figure 2.0: Percentage of conclusion derived from the case study

Based on the case study, the team had found out most of the questions asked
revolving around the ABC approach calculation which is approximately 50% of
the overall content of the case study. While another 30% revolved around on
how to determine the decision making by using the ABM concept and other 10%
respectively were on how to analyze the data generally and the correlation of
team work to determine the solution for the case study.

Managerial Accounting Group 8.0 | 21

 REFERENCES

B OOKS

Drury, C. (2004). Management and Cost Accounting, 6th Edition. In C. Drury. Thomson.

Ray Garrison, R. G. (2008). Managerial Accounting, 12th edition. In R. G. Ray Garrison,

Managerial Accounting, 12th edition (p. 309). Boston: McGraw-Hill Higher Education.

Websites
(n.d.). Retrieved from stock.xchng - the leading free stock photography site: http://www.sxc.hu

(2004-2009). Retrieved from accountingcoach: http://www.accountingcoach.com/online-

accounting-course/36Xpg01.html

(2006). Retrieved from askmehelpdesk: http://www.askmehelpdesk.com

(2007). Retrieved from social publishing : http://www.scribd.com

(2009). Retrieved from valuebasedmanagement.net:

http://www.valuebasedmanagement.net/methods_abc.html

22
APPENDIX

23
 Managerial Accounting: Group Project
Activity Based Costing

Question 1
Product Cost per Unit - Current System

Valves Pumps Flow Controller

Materials $16.00 $20.00 $22.00
Direct Labor based on run labor 4.00 8.00 6.40
*Manufacturing overhead 17.56 35.12 28.10
Total Standard cost $37.56 $63.12 $56.50

The Overhead calculation are as follows:

Machine depreciation $ 270,000 $16 LPH x 168hrs
Set up labor $ 2,688
Receiving $ 20,000
Materials Handling $ 200,000
Engineering $ 100,000
Package Shipping $ 60,000
Maintenance $ 30,000
Total $ 682,688

Total run labor = 9725 hrs x $16

= $155,600

Overhead rate = $682,688

$155,600
= 4.387455013 or 439%

* Manufacturing overhead = 439% x direct labor

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

tbm_CASESTUDY
 Managerial Accounting: Group Project
Activity Based Costing

Question 2
Estimated Contribution Margin for the 3 products

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

Contribution margin = Sales - Variable Cost

Products Standard Cost Revised Standard Cost

Valves $37.56 $49.00
Pumps $63.12 $58.95
Flow Controller $56.50 $47.96

tbm_CASESTUDY
 Managerial Accounting: Group Project
Activity Based Costing

Question 3
Revised Product Unit Cost per "More Modern View"

Valves Pumps Flow 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

*Material Related Overhead

Receiving $20,000
Material Handling $200,000
Total $220,000

Overhead Allocation rate on Materials Cost = $220,000

$458,000
= 0.480 or 48%

So material overhead
for the 3 products = 48% x Material Cost

**Other Overhead on Machine Hour Basis

Machines Depreciation $ 270,000

Engineering $ 100,000
Packing and Shipping $ 60,000
Maintenance $ 30,000
Total $ 460,000

Overhead Allocation Rate= $460,000.00

10,800 hrs
= $42.59 machine per hour

To calculate other overhead = $42.59 x Machine Hours

tbm_CASESTUDY
 Managerial Accounting: Group Project
Activity Based Costing

Question 4
Products Costs Using Activity Based Costing

(a) (b) (a) x (b)

Valves
Activity Rate Activity ABC Cost
Materials $16.00 7,500 120,000
Labor $4.00 7,500 30,000
Overhead:
Setup Labor 0.02 128
Receiving 0.08 600
Material Handling 0.80 6,000
Packing & Shipping 0.32 2,400
Engineering 2.66 20,000
Maintenance 1.40 10,500
Machine Depreciation 12.50 93,750
Total Overhead $17.78 133,378
Total Cost $37.78 283,378

(a) (b) (a) x (b)

Pumps
Activity Rate Activity ABC Cost
Materials $20.00 12,500 250,000
Labor $8.00 12,500 100,000
Overhead:
Setup Labor 0.05 640
Receiving 0.30 3,800
Material Handling 3.04 38,000
Packing & Shipping 1.11 13,800
Engineering 2.40 30,000
Maintenance 1.39 17,400
Machine Depreciation 12.50 156,250
Total Overhead $20.79 259,890
Total Cost $48.79 609,890

(a) (b) (a) x (b)

Flow Controller
Activity Rate Activity ABC Cost
Materials $22.00 4,000 88,000
Labor $6.40 4,000 25,600
Overhead:
Setup Labor 0.48 1,920
Receiving 3.90 15,600
Material Handling 39.00 156,000
Packing & Shipping 10.95 43,800
Engineering 12.50 50,000
Maintenance 0.53 2,100
Machine Depreciation 5 20,000
Total Overhead $72.36 289,420
Total Cost $100.76 403,020

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

tbm_CASESTUDY.xlsx
 Managerial Accounting: Group Project
Activity Based Costing

Question 5
Comparisons of Reported Income Between the Two Methods

There will be no difference. Each month reflects two different methods of assigning the same actual costs to the three products. The total results
for the company will be identical.

tbm_CASESTUDY
 Managerial Accounting: Group Project
Activity Based Costing

Question 6
Comparison of Product Profitability Under Three product Costing System

Valves Pumps Flow 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 Cost 37.78 48.79 100.76

Gross Margin 20.00 32.47 -3.69
Gross Margin % 35% 40% -4%

System favor and reason why:

The total reported results are the same for the company under the three methods. The accounting allocations for
individual product lines change the gross margins significantly. Product line profitability changes most significantly
for flow controllers under ABC, dropping from the highest gross margin product to a loser. Given the "complexity"
reflected in Exhibit 3 for flow controllers, the activity/transactions costing system bears out the higher proportion of
costs.Therefore it is "better" than other systems. Also, although there could be differences in some cost allocations
such as engineering and maintenance, 100% of the costs are allocated on a reasonable resource consumption basis
using ABC.

tbm_CASESTUDY
 GROUP ACTION PLANS
(Haidar; Elmahie; Kaziwa; Safni)

 To understand the ABC and ABM concept

 To plan and recommending a new practice to better enhance the
previous norms of the organization- transition from traditional costing
No: MA_01 Objectives: approach to modern costing approach
 To present the strategic problems or opportunities identified in the
organization which will give a direct impact on the goals of the unit
organization.
Process of fulfilling the Managerial Accounting Group Project Paper
Initiatives:
requirement successfully.

Action Plans/Milestones Period Person responsible Output

1. The case study title Case study All  Review and read the
 Tijuana Bronze handed on case study
Machining 29/08/09  Get the general idea
(Saturday) on what the case
study discussed

2. Arrange a delegation First attempt All Rough Outlines for the

tasks and discuss the 29/08/09- (discuss in class and via Case study
outlines. 31/08/09 online) (Refer to page 3)
(Saturday-
Monday)

3. Assigned the 2nd 5/09/09 or  Haidar  Group Action Plans

meeting to report the 6/09/09 - Answer questions 1 and 2  Answers of questions
first result. (Saturday- - extra findings 1 to 8
Sunday)  Extra findings data
4. Set up another meeting [Yet to be  Elmahie
to report based on the confirmed] - Answer questions 3 and 4
tasks assigned. - extra findings
Expected
ready by  Kaziwa
- Answer questions 5 and 6
Friday on
- extra findings
4/09/09
 Safni
- Group Action Plans
- Answer questions 7 and 8
- extra findings

Managerial Accounting Group 8 | 30

 GROUP ACTION PLANS
(Haidar; Elmahie; Kaziwa; Safni)

5. Collection of data 7/09/09 -  Safni– Presentation  Tijuana Bronze

 Prepare the 12/09/09 Templates and report wrap Machining
presentation (Monday- up Presentation slides
 Findings from Sunday)  Elmahie – input all the data
external sources in slides
(internet/books) to  Haidar & Kaziwa- make
support sure the calculation answer
presented in excel form

6. 3rd meeting discuss the 13/09/009 All  Tijuana Bronze

preparation of the (Sunday) Machining Report
report according to the Time frame to
tasks assigned. do the report
(13/09-09 -
26/09/09)
Expected
ready by
27/09/09

7. The compilation of the 27/09/09  Final report

final (the total page (Sunday)  Presenter
All
would be confirm later)  Presentation slides
8. Appoint one presenter

9. Recheck and correct Due till one day Recheck with Prof and members of classmates- Are we in
before the right track?
submitted date
Tijuana Bronze
25/10/09
11. Submit and present All Machining Case Study
(Sunday)
Complete
 Need to be concise and precise in developing the report
 Time to meet and discuss the project
Barriers  Need full understand the ABC concept and trivial challenge
calculation questions

yang besar

Managerial Accounting Group 8 | 31

 GROUP ACTION PLANS
(Haidar; Elmahie; Kaziwa; Safni)

OUTLINES FOR PRESENTATION & REPORT:

1. Company’s Background
 Description of the company history including:
o Business involved
o The company’s performance (for benchmark)

2. Company’s Effort
 What they have done to capture the essence of global competitive
advantage
o The accounting calculation (questions given 1-7)

3. Identification of the current problems

 Dictation of what problems of managerial accounting practice
concerned
 List of the problems identified
 Problem to focus on- more or less on what they should done to solve
the problems
o Traditional costing approach to Modern Costing approach
o JIT policy
o Product costing system

4. Suggestion Planning/ Recommendations/solutions towards the problems

 The pros and cons of action project solutions.

 The impacts towards the company
 Supported analysis the recommendation- accounting for sustainability

5. Conclusion

The report would be more precise on the calculations and the reasons behind it
(answering all the questions requirements)

Please feel free to add or delete as needed. Ideas on the outlines would be
much appreciated. Kindly inform me what you think (agree or do not agree or
want to change) about the dates provided on the table so that we can include
this group action plans in our report too.

THANKS and Happy Ramadhan

Managerial Accounting Group 8 | 32