CASE ANALYSIS REPORT
Managerial Accounting: John Deere Component Works.
John Deere Component Works (JDCW), subdivision of John Deere and Co. was in charged specifically of the manufacturing of tractor component parts. The demand for JDCW’s products had problems due to the collapse of farmland value and commodity prices. Numerous and constant failures in JDCW’s competition for bids, alerted top management to start questioning their current costing methods. As an outcome, the analysis has to be guided to research on the current costing methods with the intention of establishing legitimacy and to help the company in adopting a more appropriate costing system.
Q1. How did the competitive environment change for John Deere Company
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• The system also fails to compute material usage variances, which only further discredits the accuracy of the accounting cost structure. For more accurate measure of material usage, the quality assurance department must include this variance calculation in its weekly report.
• A further weakness is that the accounting department issues reports that only indicate how each area operates, rather than evaluating the performance of each area, which would prevent a constriction in cost efficiency. These weaknesses prevent JDCW from accurately accessing its true costs.
Q3. How were the limitations of the existing cost system overcome by the ABC Cost System? What are the implications of the ABC system?
Essentially, with the current cost system, the managerial analysis is highly flawed due to a lack of crucial in-depth cost information, as indicated by: 1) JDCW already had three cost pools with appropriate cost drivers for each; 2) JDCW distinguished variable ("direct") and non-variable ("period") overhead; 3) JDCW did not fall in the trap of charging under-capacity utilization out to current production levels (i.e., they used "normal volume" in the denominators of their rate computations).
The inconsistency in their accounting system makes that JDCW's cost drivers show all unit-based, whereas many overhead costs (41 % of the total overhead costs) are independent of units
Assuming that the company’s goal is to maximize profits, the current cost system is not an appropriate tool for strategic planning. The ambiguity of the overhead costs per product makes it difficult to accurately analyze the cause and effect relationships of changes and/or improvements to specific product line.
Should ABC opt to utilize machine hours as a cost driver, they would be operating under the most well-known classification schemes, known as the manufacturing cost hierarchy. The manufacturing cost
While we are performing our analysis on different aspects of the company, we look at the three main types of cost. When we remain devoted to improving our costs, and the faults related, we show our same devotion to our consumers. This is portrayed by the quality of products we put on the shelves. Prevention costs, appraisal costs and Failure costs are areas
3. Briefly describe how the current production cost assignment system works. What are the consumption ratios (activity percentages) for assigning manufacturing overhead to each product at present?
Q3. How were the limitations of the existing cost system overcome by the ABC Cost System? What are the implications of the ABC system?
The current cost system is based on two components: a direct and indirect cost measurement.
Costing system is the most important part for any business or engineering company. Cost accounting is necessary for a company to be able to exercise control over the actual costs incurred compared with planned expenditure. From the point of view of cost control, a costing system should not only be able to identify any costs that are running out of control but should also provide a tool that can assist in determining the action that is required to doing right things.
Besides this there are certain advantages of cost accounting to the management i.e. it helps in price fixation, in revealing profitable and unprofitable activities, idle capacity, in controlling cost and also helps in inventory control.
Cost volume – the ABC system works best with a large number of cost activities and continually running a cost analysis to maintain each activity. Therefore, for some small firms or firms with a few product lines will not benefit as well from the system.
The target costing case literature contains numerous examples of Japanese cost management practices; however, few cases describe the use of target costing by large companies outside Japan. The purpose of the Mercedes-Benz AAV case is to consider the competitive environment of a leading German automotive manufacturer and the company 's response to changing competitive conditions. The teaching plan generally follows the suggested student assignment questions. In places, I recommend considering additional material during the case discussion. These questions are identified by a check mark.
It is recommended that CE implements the ABC system due to its benefits and ability to allocate multiple costs to address the overcosting and undercosting issues. In order for CE to remain profitable in the
Management was being misled by the traditional product-costing system, because the high-volume product lines were being overcosted and the low-volume product line was being undercosted. The high-volume products
The aim of this essay is to explain the purposes of full absorption product costs which are categorized into traditional method and Activity-Based-Costing (ABC) system; to examine the benefit of ABC system that outweigh traditional method; to analyse the survey finding that only about 15 per cent of companies surveyed use ABC system; and to justify why ABC system has been found to be more useful in financial and service organisations.
The traditional budgeting methods have failed to meet increasing complexity and changing needs of the organizations. Many of the managers of the major organizations believe that the traditions costing methods bring serious cost distortions that hinder the strategic decision-making process. More so, the traditional budgeting method encourages a behaviour that is against the efficient utilization of the company resources and the objectives of the companies.