From: Michael Carpenter (50234209)
To: Excellent Course Instructor – Michael Opara
Subject: National Motor Company – ACCT 525 Summer 2 Project
In its efforts to improve operational efficiency and increase profitabilit
...
From: Michael Carpenter (50234209)
To: Excellent Course Instructor – Michael Opara
Subject: National Motor Company – ACCT 525 Summer 2 Project
In its efforts to improve operational efficiency and increase profitability, National Motor
Company (NMC) has identified that its current methodology for assigning cost figures is
misguided. Assigning cost figures to specific cost objects is the central task in
budgeting, planning, and financial reporting. Without accurate information, NMC is
unable to properly analyze their two divisions, Classic and New Wave, and to make
improvements.
Current Weaknesses and Improvements
There are several weaknesses in NMC’s current cost allocation process. While NMC
believes that it has a good handle on direct costs, their current methodology is
inconsistent and flawed.
One of the most notable weakness in NMC’s current cost allocation process is
allocating costs (50-50) for fixed overhead-general on the basis that the two divisions
take up relatively the same amount of space. Arbitrarily dividing common costs among
business segments can lead to distorted segment costs. While property taxes and
payments for guard and janitorial expenses can be evenly split, the fixed overheadgeneral
category also includes plant amortization and plant power/utilities which should
both vary based on usage. As listed, New Wave generally only uses 40% of total
machine hours (MH). Allocating the costs equally will result in a higher amount of cost
allocation to the New Wave division and improperly benefit the Classic division.
Improvement: Plant amortization and plant power/utilities should be split based on MH
usage. Therefore, Classic should be allocated 60% of costs and New Wave 40% in this
category.
NMC’s current process of allocating direct labor hours based on manufacturing
labor hours is also a weakness. Direct labor hours should be tied to products as a
direct cost. Such inconsistent costing can lead to the overstatement or understatement
of production costs.
Improvement: New Wave and Classic should measure direct labor cost data
separately for each production division with a job-order costing system. By maintaining
this information, management will be more able to track performance in an objective
manner.
Yet another weakness of NMC’s cost allocation process, variable overhead which
includes indirect labor such as rework labor, supervisor and plant manager wages as
well as indirect materials such as scrap and warranty expense estimates is currently
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