1- CONTEXT AND BISEINESS MODEL

Is a traditional cost accounting system, mainly includes direct, indirect costs and overhead costs. M

VALVES (7500) PUMPS (12500)FLOW C. (4000)

2- Direct Material $16.00 $20.00 $22.00
Direct Labour (Run) $4.00 $8.00 $6.40
Overhead Costs $17.55 $35.10 $28.08
Total Cost/Unit $37.5 $63.1 $56.5

Overhead cost including Setup Labor

Overhead based on Run Labor

VALVES (7500) PUMPS (12500)FLOW C. (4000)

3- Sales 57.78 81.26 97.07
Variable Cost 16 20 22
Contribution Margin 41.78 61.26 75.07
Variable Cost is Direct Material

4- REVISED VALVES (7500) PUMPS (12500)FLOW C. (4000)

Material 16 20 22
Setup Labor 0.02 0.05 0.48
Direct Labor 4 8 6.4
Material Overhead 7.69 9.61 10.57
Other Overhead 21.30 21.30 8.52
Total Cost/Unit 49.00 58.95 47.97
 VALVES (7500) PUMPS (12500)FLOW C. (4000)
5- Direct Material 120000 250000 88000
Direct Labour (Run) 30000 100000 25600
Overhead Costs 134128 260240 288320
Recieving 600 3800 15600
Mat Handling 6000 38000 156000
Engineering 20000 30000 50000
Packing 2400 13800 43800
Maintanence 10500 17400 2100
Dep 94500 156600 18900
Setup Labor 128.000000025 640 1920
Total Cost 284256 610880 403840
cost/unit 37.90 48.87 100.96

VALVES (7500) PUMPS (12500)FLOW C. (4000)

6- Actual Selling 57.78 81.26 97.07
Traditional Cost 37.55 63.10 56.48
Gross Margin 20.23 18.16 40.59
Gross Maring Percentage 0.35 0.22 0.42

Modern Cost 49.00 58.95 47.97

Gross Margin 8.78 22.31 49.10
Gross Maring Percentage 0.15 0.27 0.51

ABC Cost 37.90 48.87 100.96

Gross Margin 19.88 32.39 -3.89
Gross Maring Percentage 0.34 0.40 -0.04

Given the three-cost analysis methods we have concluded that TBM should opt for
the ABC costing. The ABC solution offers a more accurate representation of the
associated costs for each of the three product lines. ABC offers explanations as to
why TBM have been previously unable to understand how competitors were able
to offer pumps at a lower price. It also explains why increasing the flow
controllers did not have an effect on the quantity of sales in Flow Controllers. It is
clear when using the ABC costing method that TBM actually generate the highest
gross margin on pumps, and at present are losing money on the product that
should be their cash cow, the Flow Controllers.
TBM could consider dropping the Pumps from the products offered. This would
save significant set up costs, and in a market that is both highly competitive and
slowing could enable them to focus efforts in the other two. There is no scope
margin to further reduce the price, so if they wish to remain in this market, we
would recommend a strong push from a sales and marketing/business
development point of view.

We have concluded that whilst Flow Controllers are currently operating at a loss
when using the ABC method that they still hold the key and are in fact the biggest
opportunity. Given the lack of competition, and the markets willingness to accept
a price rise TBM have an opportunity to capitalise off of this. Currently TBM are
manufacturing this product to order, moving to a supply-based production from
the current demand-based production will save set up costs and decrease the
price of production which in turn will increase the margin. There is also the
option to increase the price again, but this should be carefully monitored since
there has already been a recent price increase and could therefore alienate
customers.
sts and overhead costs. Mainly depends on selling Valves, Pumps and Flow controllers.

W C. (4000) Required Data

Valves Pumps
Quantity 7500 12500
Run Labor h/u 0.25 0.5
Labor/hour $16
Overhead costs (Lacking Setup Labor) 680000
Setup Labor $2,688
Total Overhead costs (Inclu setup labor $682,688
Run Labor hr/monthly total 9725

Overhead allocation 4.39

W C. (4000)

W C. (4000) Valves Pumps

Setup Labor 0.02 0.05

Material Overhead(Based on Material Cost) 7.69 9.61

Other Overhead(Based on Machine Cost) 21.30 21.30
Machine Hours 0.5 0.5
W C. (4000)
Recieving 20000
Mat Handling 200000
Engineering 100000
20000 Packing 60000
200000 Maintanence 30000
100000 Dep 270000
60000
30000 80000 2400 15200
270000 120000 3600 22800
2688.000000025 Mat Handling 6000 38000

W C. (4000) 4 2
2
0.5
Flow
4000
0.4

Flow

0.48

10.57 0.480349345
8.52
0.2
62400
93600
156000
CONTEXT AND BISEINESS MODEL
Very traditional cost accounting system, build from measurement of direct and indirect costs and on assumpt
about prodution and sales activity. TBM allocates the total overhead cost assigned to production on the basis
production-run labor costs.
nd indirect costs and on assumptions
signed to production on the basis of