Bridgeton Case Study

Managerial Accounting

Discussion Questions:  Bridgeton Industries

3.         1988 Model Year

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1990 Model Year

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4.        According to the situation described in the case, it’s appropriate for use before 1988 (including 1988), but not appropriate for use after 1988. Before 1988, the formula to calculate overhead percentage was carefully determined after consulting. Therefore the calculation was appropriate for the year 1987 and 1988. However, at the end of 1988, oil pans and muffler-exhaust systems were outsourced from the ACF. This policy caused a loss of 90 position. The cost for the 90 people was not a part of plant burden cost. The change resulted the decrease in direct labor. The new direct labor was nearly half of the old direct labor cost. However, overhead cost did not cut aproportionally, only 30% of over head cut off. Thus, the overhead percentage rise from 434% to 577%, a great deviation from appropriate percentage studied in 1987. The aproportional relationship between direct labor cost and overhead was destroyed. Remaining manufacturer lines would bear more overhead than they should bear. Therefore, it’s not approporiate to use the calculation after 1989 (including 1989).

5.        a.  (1) If no additional products are dropped:

If no additional products are dropped, and selling prices, volumes and materials costs for all three classes remain the same for 1991, then the budget for 1991 would be the same as 1990 model year.

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(2) If the manifold product line is dropped:

As suggested in the case, the manifolds were moved to Class III in the 1990 model year, which means that the manifolds were classified as candidates for outsourcing. Therefore, the changes brought by dropping manifold product line should be similar to those brought by dropping the muffler-exhausts and oil pans product line which occurred at the end of 1988. Therefore, the percentage change in Overhead Costs as a percentage of Direct Labor from 1988 (434%) to 1989 (577%) would give a reasonably accurate standard for calculating the Overhead Costs as a percentage of Direct Labor in 1991. The percent change is (577%-434%)/434% =33% (32.9). Therefore, the Overhead Costs as a percentage of Direct Labor in 1991 is estimated as 749% (563%*133%).