Prashant Garg

Individual Assignment 2 (MAC Destin Brass)

Sept 2013, MBA HEC PARIS
February 1, 2014
Professor Sebastian Becker

1. What are the managerial concerns that managers at Destin Brass have, and why do
they look into costing systems for a solution?
The company has three product offerings Valves, Pumps and Flow Controllers. They feel
that margins on Pumps have significantly reduced, whereas they feel that Flow controllers
have a very comfortable margin.
They are perplexed that how come competitors are, on the one hand able to price Pumps at
such a low cost, and on the other, not giving them any competition on Flow controller prices.
Thus they are concerned that maybe they are not calculating their margins properly with the
current costing system, which is leading to an inefficient pricing system.
Currently, they calculate costs of each product by allocating overheads on a flat rate based
on labor costs across each product (the overhead rate is 439% of labor based on their
standard costing system).
Looking into the costing system, and drivers of the overheads, we see that this is indeed the
case. The following table depicts how the overheads would be allocated based on their
drivers, rather than a flat rate
Particulars Allocation Base Valves Pumps Fl. Cont. Total
A. Current Overheads Allocation Labor cost (439%) 131,700 439,000 112,384 683,084
Per Unit Overhead Allocation

17.56 35.12 28.10

Current Gross Margin

35% 22% 42%

B. Proposed Activity Based Allocation

Set-Up Labor Production Runs 128 640 1,920 2,688
Machine Depreciation Machine Hours 93,750 156,250 20,000 270,000
Receiving Transaction 620 3,876 15,504 20,000
Materials Handling Transaction 6,202 38,760 155,039 200,000
Engineering Work-Order Run 20,000 30,000 50,000 100,000
Packing and Shipping Packing Orders 2,000 14,000 44,000 60,000
Maintenance Machine Hours 10,417 17,361 2,222 30,000
Overhead Allocation ABC System

133,116 260,887 288,685 682,688
Overhead Per Unit

17.7 20.9 72.2

ABC Computed Gross Margin

35% 40% -4%