Huron Automotive

Group 5 Section C Anubhav Tiwary Deepankur Malhotra Mithun Madhusudan Saurabh Singh Siddharth Agarwal

(1211171) (1211178) (1211198) (1211221) (1211226)

Background
Huron Automotive Company
Selected vehicle parts supplier Competed on basis of price Focus on small volume parts Five production departments
Grinding Machining

Carburetor & Fuel Injection Division

Casting & Stamping Custom Work
Assembly

Spare parts Standard products Custom work

Present Costing Method

Single, plantwide direct labor hourly rate a single cost center
Direct labor rate includes both direct labor and factory overhead cost Overhead cost calculated by combining all departments No method available to assign overhead to each department

Proposed systems
Proposal 1
Department wise hourly costing rate Labor hours and payroll costs

Proposal 2
Based on normal volume of five departments over the course of the year

already traceable to departments

Some overhead items such as

supervisor salaries and equipment depreciation traceable Other overheads allocated using

Normal

volume

estimated

by

competent authority Uses rates normalized departmental

suitable basis e.g. cubic feet of

space occupied for allocating

Labor

cost

same

under

two

methods Difference in allocation of overhead costs to various departments

heating costs

Comparison of costing systems

Present system has lower costs than either of the two new proposed methods Insignificant difference between either of the two proposed systems
Costs similar for individual activities Actual costs depend on monthly variance in volumes Costs for 100 unit batch of CS-29 carburetors

First proposal
Casting / Stamping Grinding Machining Assembly

Revised proposal
Casting / Stamping Grinding Machining Assembly

Comparison of costing systems

Present system Uses single cost center costs
System 1 & 2 Do not differ much from each other; average overhead cost in Exhibit 2 is similar to the normal calculated rates in Exhibit 4 Largest proportion of costs are machining and assembly

proportional to all the work plant wide Jobs could be overvalued based on resources they consume Cross subsidization between

for which there is only a slight difference (5% for assembly and 2% for machining) in calculated rates System 1 uses July actual, while system 2 uses estimated rates based on normal volume. Actual cost differences between systems will depend on the variance in volumes across months. Since system 2 uses estimated rates for a fixed business cycle, it provides a more stable pricing basis

departments, however total production costs will remain the same irrespective

of method of costing used

Recommendation Proposal 2 (normal rates)

Sales manager Changing costing system Director Financial Planning Rates changing every month, products begin to show losses in spite of sales holding up. Is the product really losing money or is it because it cant carry share of idle capacity? Response - Distribute costs of idle capacity according to Production manager Cannot charge accurate costs in machining/assembly in impacts prices Profits/loss within product line immaterial as long as overall product line remains profitable Response New system periods of under capacity Response - Overhead costs in proposal 2 have been

arrived at based on a normal estimate of volume.

helps determine exact cost of each product, division can continue to produce loss

Therefore, costs of over/under capacity should average out over a period.

actual costs of jobs/margins of jobs. Does not imply that only certain jobs will start showing

making items, helps identify reasons for loss making

products

losses

Thank You