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ACCT 525 - NMC Project Paper. 2021

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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 a ... nd 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 [Show More]

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