Easterclock

1) Prepare a report addressed to the management of Eastclock Corporation which clearly identifies and analyzes the issues it faces, and make specific recommendations for improvement.

Analysis

Although the company's main concern is the decrease of its sales over the past 3 years, the revision of the cost system has attracted our attention. The company defines the price of its products base on the product's profit margin, knowing that it is important to evaluate the company's cost practices in order to determine whether it cost system best fit to its activities or not.

The investigation reveals certain information that could be useful to improve the current cost system. Conversations with different department representatives reveal that some of them have detected a casual relationship between each product and the amount of work required by each one. The Engineering Department has identified that with the current mix of product their time is split in approximate 75% Custom, 20% Deluxe and 5% Standard. The Quality Control department has also identified that with current mix, their time is split among product in the follow relation: 60% Custom, 20% Deluxe and 20% Standard. On the other hand after talking to the supervisor of machining and assembly, we discovered that costs labeled "Other Manufacturing" are distributed among product in proportion of the product volume of sales, although, there is not an casual or observable relationship between volume of sales and these costs.

Other fixed costs such as Depreciation and Selling and Administrative are distribute according to direct labor dollars and volume of unit sold respectively.

Recommendation for improvement

1.- Change the allocation criteria for Engineering Department costs. The specific suggestion involves using the proportions provided for the department which are related to the specific effort employed for the department on each product (75% Custom, 20% Deluxe and 5% Standard), and make adjustment according to the mix.

2.- Change the allocation criteria for Quality Control Department costs. The specific suggestion involves using the proportions provided for the department which are related to the specific effort employed for the department on each product (60% Custom, 20% Deluxe and 20% Standard), and make adjustment according to the mix.

3.- Change the allocation criteria for Other Manufacturing from using volume of units sold to use proportion of Direct Labor hours, this is because there is not evidence of a casual or observable relationship between volume of sales and these costs.

4.- Change the criteria for allocating Depreciation, from proportion of total direct labor dollars to proportion of total machinery hours.

5.- Hire a consultant in the field of Industrial Engineering to evaluate the possibility of improve the layout and estimate the future benefit of that.

Base on the results obtained after reallocating the fixed cost of 2004 according to the changes suggested (see appendix 1), it seems pertinent to make a decision about the Custom model, either regarding the price, the volume or both.

Given the fact that the Marketing manager expressed that this kind of product is offer as a service for regular costumers, we suggest reduce the volume of Customs to be offered and adjusting the price in order to get a better profit margin for this product, by doing this, there will be certain amount of time remaining that could be use either to produce more Standard or introduce the new product.

Budget 2005

Assumptions A:

1. All the recommendation regarding cost allocation will be used in the budget.

2. The volume and price for Deluxe product will be the same.

3. The