logo image

Managerial Case – Sharp Paper

Subject: Evaluation of our cost assignment system and suggestions for changing it, and evaluation of current and intended cost calculation system on LLHC.

Advantages and Disadvantages of our cost accounting system:

Presently we employ a very straightforward cost assessment system which is also used by other companies in our field.

Cost of Manufacturing can be distinguished into three components which are:

 

1.      Direct Costs

2.      Overheads

3.      Shipping and Warehousing

 

Direct Cost:

 

Direct Costs can be easily ascertained because while evaluation direct costs we only need to take into ac...

Need essay sample on "Managerial Case – Sharp Paper"? We will write a custom essay sample specifically for you for only $13.90/page

...count the actual cost of raw material used and the cost of labor directly associated with the product in question..

 

Overheads:

 

Overhead Costs are on going expenses and cannot be directly attributed to certain volume of a particular item that has been manufactured. The machining costs are included as overhead cost. We employ a straightforward policy of dividing the total overhead expenditure by number of tones manufactured.

 

Shipping and Warehousing:

 

At present shipping and warehousing cost are assigned at $30 per ton this figure has been achieved by dividing total shipping and warehousing costs by the total output.

 

 

Advantages of cost assessment method that we currently employ:

It’s a very rational system which is also used by other companies including some  of our competitors.

 

·         It is a very straightforward system hence it can be easily implemented.

 

·         The system has been working well all these years and we haven’t faced any problems with it.

 

 

Disadvantages of our cost assessment method:

 

·         The system lacks accuracy and generalizes all products irrespective of the fact that some products need special handling

 

·         Cost incurred while receiving the raw materials are totally ignored.

 

·         Cost of carrying the inventory is totally ignored.

 

·         Some cost need to be calculated on per item basis but in order to generalize all costs  are evaluated on a per ton basis.

 

 

Suggestions for improving the cost assignment system:

 

In order to eliminate the discrepancies in our cost assessment system we need to revise

certain aspects of our system and adopt new methods. We face no problem in calculation of direct cost and overheads however we do experience serious inaccuracy where shipping and warehousing are concerned.

 

 

We need to distinguish between the receiving and shipping function and ascertain a volume based cost for each of these function apart from that we also need to target the cost of carrying inventory.

 

Here is how our current cost analysis system works:

 

 

 

 

Cause Expenditure
Volume
Amount in $
Furnish (3 different Pulps)
2,225 Pounds
450
Additives (11 items)
200 Pounds
500
Tub Size
75 Pounds
10
Recycled Scrap Paper
(296) Pounds
20
Total Direct Materials
Total 2,500 pounds
940
Direct Labor

450

1390
Paper Machine
100 per ton (1.25 Tons)
125
Finishing Machine
120 per Ton (1.25 Tons)
150
Total Overheads

275
Shipping and Warehousing

30
Total Manufacturing Cost

1,695

Direct Cost
 

 

 

 

 

Overheads

 

 

 

 
Therefore the cost of manufacturing 1 ton of LLHC is $1,695 as evaluated by our present cost assessment system.

 

Implementing revisions to the cost assessment system for LLHC:

 

For sake of revising the costs of Manufacturing LLHC we need to add the following parameters.

 

·         Cost of receiving raw materials

 

·         Cost of picking and shipping

 

·         Cost of carrying inventory

 

 

Cost of receiving Raw materials:  The mill at Memphis employs 15 employees for receiving centre. The following table displays the cost incurred by the receiving centre the total costs of the receiving’s work out to $ 1.97 per ton ($ 2 per ton approx).

 

Managerial Case –  Sharp Paper    5

 

 

 

Cost of 30 employees (Annual)
$ 600,000
Other Cost (Annual)
$ 500,000
Total Cost (Annual)
$110,000
Tons Processed in 2006
56,000 Tons
Receiving Cost per Ton
$ 1.97 ton ($2 per ton approx)
(All figures in this table reflect the records of the receiving centre for the year 2006)

 

 

Cost of picking and Shipping: The picking and shipping department evaluates its expenses on a per shipment basis. A single shipment may comprise of 2 or 3 cartons. Every ton of LLHC comprises of about 14 cartons. Shipping records reveal that in 2006 1 ton of LLHC comprised of 7 shipments.

 

Thus with the Cost per shipment for LLHC work out to $ 12 per shipment (approx).

 

The following table displays the per shipment evaluation of cost.

 

Annual Cost of 40 employees
$ 1,200,000
Other Annual Cost
$ 1,100,000
Total Annual Cost
$ 2,300,000
No of Items shipped in 2006
190,000
Average cost of shipment
$ 12 (approx)
(All figures pertaining to records of picking and shipping department for the year 2006)

 

 

Cost of carrying inventory: The company policy indicate that 25 tons of LLHC be maintained. Since LLHC is a low volume product maintaining an inventory results in blocking of funds which could have been utilized other wise to gain attractive returns.

 

Thus adding 16% to the total cost will account for this loss.

 

In order to incorporate the revisions to the cost of manufacturing 1 ton of LLHC we need to replace $30 per ton shipping and warehousing cost with $ 2 / ton receiving charge and $12 / shipment shipping charge. The cost table below reflects the revisions.

 

 

 

 

 

Managerial Case – Sharp Paper     6

 

 

Cause Expenditure
Volume
Amount in $
Furnish (3 different Pulps)
2,225 Pounds
450
Additives (11 items)
200 Pounds
500
Tub Size
75 Pounds
10
Recycled Scrap Paper
(296) Pounds
20
Total Direct Materials
Total 2,500 pounds
940
Direct Labor

450

1390
Paper Machine
100 per ton (1.25 Tons)
125
Finishing Machine
120 per Ton (1.25 Tons)
150
Total Overheads

275
Cost of Receiving Raw materials
$2 per ton
2.5
Cost of Shipping
$12 per shipment (7 shipment per ton)
84
Total Cost

1751.5
Cost of carrying Inventory
@ 16 %
280
Grand Total of Cost per ton

2031.5
With this system we can see that the cost per ton has risen by $ 336.5.

 

 

Analysis of the two costing system:

 

It is evident that when we incorporate the modifications in the costing system the cost per ton of LLHC evidently increases. Thus the new costing system reveals that the margin is not as attractive as it seems. With the new system our costs increase by 19.85%.

 

 

 

 

With the new system the profit decreases by 52.2 %. However the profit margin remains

 

attractive at 18.1%.

 

 

Managerial Case – Sharp Paper     7

 

Effects of implementing the new cost system on other low Volume Products:

 

The new costing system helps to accurately ascertain the receiving cost and the shipping and warehousing costs. With this system we can determine accurate price of receiving and shipping for those goods which require special handling. The cost of maintaining inventory addresses the expense incurred on warehousing products for a long period of time. With accurate allocation of costs to low volume products we can observe a reduction in cost of high volume products and therefore a rise in profitability of these products.

 

 

Consequences of dropping a few high volume low profit products:

 

High volume products amount to about 80% of total sales. In 2006 we produced 200,000 tons of paper and sold 180,000 tons of it. An overwhelming portion of our sales come from high volume products.

 

 

A decision to drop some high volume products may affect the company adversely. Following are the consequences that may follow if we drop a few of our high volume products.

 

·     Drop in the rate of Turnover: Since high volume products are responsible for 80% of the total turnover a decision to drop such products may cause significant reduction in the cash inflow. Under these circumstances normal

functioning of the company will be hampered

·      Customers will be deprived of what they need : High volume products sell well because they address the customers needs. If such products are discontinued then customers will be deprived of those products which best suit their needs this will lead to a loss of reputation.

·     Competitors will exploit the situation: Our company is known for variety if we discontinue our best products competitors stand to benefit a great deal. They would gain customers by providing them those items which we denied.

 

 

Alternative proposals for increasing profitability

 

An attempt to discontinue some of our high volume products may lead to harmful and irreparable consequences but there are certain course of action which carry a lesser risk factor. Here are some possible alternatives for increasing profitability.

 

 

Emphasis on transforming low volume products into high volume products:

 

Our list of 240 low volume products needs to be examined for those products which may appeal to the customers needs following which we need to chalk out and implement a marketing strategy for such products. With this plan our emphasis would be to try and convert most of are low volume products into high volume products.

 

 

Emphasis on increasing profitability of our high volume products:

 

We need to reevaluate the entire manufacturing process of our high volume products and analyze it to determine whether or not we have opportunities for cost reduction. For this purpose we should consider the idea of upgrading out technology if it may help to increase the speed and efficiency of production.

Read full document

Can’t wait to take that assignment burden offyour shoulders?

Let us know what it is and we will show you how it can be done!
×
Sorry, but copying text is forbidden on this website. If you need this or any other sample, please register
Signup & Access Essays

Already on Businessays? Login here

No, thanks. I prefer suffering on my own
Sorry, but copying text is forbidden on this website. If you need this or any other sample register now and get a free access to all papers, carefully proofread and edited by our experts.
Sign in / Sign up
No, thanks. I prefer suffering on my own
Not quite the topic you need?
We would be happy to write it
Join and witness the magic
Service Open At All Times
|
Complete Buyer Protection
|
Plagiarism-Free Writing

Emily from Businessays

Hi there, would you like to get such a paper? How about receiving a customized one? Check it out https://goo.gl/chNgQy