Bridgeton Industries Case Write-Up
Essay by farrah_fulei • February 14, 2017 • Essay • 887 Words (4 Pages) • 1,047 Views
Bridgeton Industries Case write-up
3. In model year 1988, the overhead rate is 435% (per case), the gross margin as a percentage of selling price for product 1 is 22%, and for product 2 is 20%. In model year 1989, the overhead rate = $79,393÷$14,102 = 563%; the gross margin as a percentage of selling price for product 1 is 10%, and for product 2 is 13%.[pic 1]
Table 1
Model Year 1988 | Model Year 1990 | |||
Product 1 | Product 2 | Product 1 | Product 2 | |
Expected selling price | 62 | 54 | 62 | 54 |
Standard material costs | 16 | 27 | 16 | 27 |
Standard labor costs | 6 | 3 | 6 | 3 |
Overhead costs | 26.10 (6×435%) | 13.05 (3×435%) | 33.78 (6×563%) | 16.89 (3×563%) |
Cost of goods sold | 48.10 | 43.05 | 55.78 | 46.89 |
Gross profit | 13.90 | 10.95 | 6.22 | 7.11 |
Gross margin | 22% | 20% | 10% | 13% |
4. (a) In the case, the cost analysis breaks each product cost into 3 elements: materials, direct labor and benefits, and overhead. The material costs and direct labor and benefits costs can be objectively measured and accurately traced to each product line, while the allocation of manufacturing overhead may be more arbitrary. In this case, the plant applies overhead to products as a percent of direct labor cost.
To assess the appropriateness of the overhead costs, one approach is to analyze the overhead account. If a large portion of the overhead account is employee-related and affected by the wage rate (or seniority) of the employees, direct labor costs would be the better allocation base. Otherwise, direct-labor hours would be a better choice. Per Table 2, manufacturing overhead is split almost equally between skill-based (57%) and non-skill-based overhead (43%); therefore, using direct labor cost as an allocation base for all manufacturing overhead may not be appropriate.
Table 2
Account number | Description | Skill-based | Non-skill-based |
1000 | Wages and benefits for nonskilled hourly personnel |
| $ 7,806 |
1500 | All plant salaried personnel |
| $ 6,824 |
2000 | Production supplies |
| $ 3,794 |
3000 | Small wearing tools |
| $ 2,529 |
4000 | All purchased utilities |
| $ 8,888 |
5000 | Wages for non-production employees with specialized skill classification | $ 24,460 |
|
8000 | Depreciation and property tax |
| $ 5,946 |
9000 | Various relatively constant personnel-related expenses |
| $ 6,771 |
11000 | Project expense for M&E |
| $ 5,011 |
12000 | Benefits and overtime premium for production hourly works (wages included in direct labor) | $ 28,077 |
|
14000 | Benefits for skilled hourly workers (wages included in account 5000) | $ 9,784 |
|
Total | $ 62,321 | $ 47,569 | |
Percentage of total MOH |
| 57% | 43% |
(b) Overhead includes both fixed and variable components. When determining whether to outsource or drop any one of the product line in terms of product costs, fixed overhead is irrelevant and cannot be taken into consideration.
...
...