Indian Institute of Management Ranchi MBA

2022-24

MANAGERIAL ACCOUNTING
CASE NO 2:
Destin Brass Products Co

About the Company: Destin Brass Product Co was established in 1984. The company is solving
the market problem of manufacturing lower-tolerance brass products. The components purchased
from brass foundries were machined precisely by the company and manufactured under modern
manufacturing facilities. The equipment and labor are used for all three product lines by scheduling
according to customer requirements. The brass is delivered to the company under Just-in-time
delivery.
The company's product line consists of Valves, Pumps, and Flow Controllers, having 24%,
55%, and 21 % revenue, respectively.

Market and Competitors:

The pump market is large, where the need for the specification of being precise is less. Reports
suggest a decline in the prices for the pump forcing the company to reduce its price. The gross
margin for the pump has significantly dropped from 35% to 22 % due to the competition.
Destin brass is placed comfortably in the Flow control market. Even after increasing the price in
this market, there was no apparent effect on the demand. For making the flow control more labor
and components are required.
Valves market, the company is able to maintain the standard 35% gross. In this market segment,
competitors can easily match Destin's Quality thus hampering their market share.

Problem Faced by the Company and Questions to be Solved:

Does the current standalone costing method provide an accurate cost of products?
How can the competitors of Destin's remain profitable by lowering the prices in the pump market,
what should Destin do to remain in the market?
What should be the strategic implications of Destin based on the costing method?
How do different costing methods produce different results?
Costing Method

Overhead cost can be termed as a cost which is essential to a product and service and is not
related to production.

There can be numerous methods to calculate the overhead rate.

The different types which are mentioned in the case are -
1) Overhead rate based on direct labor (run labor)
2) Overhead rate based on machine hour
3) Overhead rate based on activity (transactions)

A) Overhead rate based on direct labor (run labor)-

In this method, the overhead rate is calculated by dividing the total overhead cost by the total cost
of run labor. The overhead rate is then multiplied by the per unit direct labor cost to get the per unit
overhead cost.
After adding all the costs, we will get the standard per-unit cost for all three products.

B) Overhead rate based on machine hours

Since it is a machine-intensive industry, Peggy Alford suggested calculating overhead on the basis
of machine hours. Under this method, the overhead rate is calculated by dividing the total
material-related overhead cost by the total direct material cost. The overhead rate (absorption rate)
is then multiplied by the per unit material cost to get the per unit overhead cost.
After adding all the costs, we will get the revised per-unit cost for all three products.
Q1. Overhead rate which is based on activities -

It is asked to calculate the per unit cost on the basis of activities. In this method, some overhead
costs are allocated on the basis of the proportion of transactions and some overheads are
allocated on the basis of the proportion of the estimated percentage.
After adding all costs, we will get the revised per-unit cost for all three products.
In this case, the per unit cost of valves, pumps, and flow controllers are $37.75, $48.87, and
$100.57 respectively.

Q2. Comparison of costs calculated under different methods and their causes -

We can see that the unit costs vary quite a bit the main reason behind this is the way in which
overhead is allocated.
Under the standard cost method, the company advocates all overhead using one factory-wide
rate based on direct labor (run labor). The problem with this method is that many of the overhead
costs do not directly relate to the production volume and allocation using labor may be causing an
inaccurate view of the actual costs.

Under the revised cost method, the company treats the set of costs as direct costs and others as
overhead costs. This method attempts to better advocate overhead to the products but with
minimal success since the method allocates the overhead with a focus on production (machine
hours) but doesn't allocate overhead directly to each product based on their actual true cost.

Under activity based costing, the two main things that stood out was the fact that activity-based
costing ends up with pumps that are lower or same in cost than the other two methods and flow
controllers that are much higher in cost. This is due to higher proportion of transactions are
allocated to flow controllers.
Q3.What are Strategic Implications?

The company should implement activity-based costing methods.

The company has always wondered if they are stable in flow controlled market with a gross margin
of 42 percent. Contrary to that the company is actually in loss of about 4 % in flow controlled
market. The actual cost of the flow controllers is higher as compared to the actual estimate. Hence
when the price was increased, there was not any significant impact . Hence in flow controlled
market-based on the ABC method company should increase the sale price to $ 155 which is a 35
% gross margin as targeted by the company initially.
The standard Unit cost of the pump is lowered as estimated in the standard costing method.
Hence it is presently greater than 22% gross margin. So the company can reduce the price of the
Pumps by setting the target price of $ 75.18 and having a 35% gross margin.

Q4. Net income under standard and activity-based costing system-

Under the activity-based costing the net income from valve sales will only drop by approximately
$1,500 due to the standard cost per unit only being 20 cents lower.
There will be a much larger difference in net income provider from pumps under activity-based
costing. The net income will be approximately $1,78,100 higer s due to the fact that the cost per
unit under activity based costing is lower the cost per unit under standard costing system by
roughly $12. This large increase in that income is almost entirely offset by the increased unit cost
of flow controllers under activity-based costing, the per unit cost of flow controllers under
activity-based costing is aorund $44 higher than the cost under standard costing, ths income is
reduced by $1,76,000. In the end the total net income under abc is approximately $400 hugher
than standard costing system.

Recommendations

Although the net income under the two methods is very similar. The more accurate cost information
obtained from using activity-based systems will allow the company to adjust their prices and their
strategy in the future in order to stay competitive and continue to grow their company.

Sr. No. Name Roll number

1. Chitraksh Uppal M012-22

2. Manan Goyal M020-22

3. Murkute Swapnil Surendra M025-22

4 Sai Bharat Krishna M039-22