Thursday, February 21, 2019
Denim Finishing Company Case Essay
Mrs. Kelsey Bowser using the ABC mode decided to use the be of garments as the appeal driver of the convertnate- everyplace be. Nevertheless, I argue that this was non the best manageable choice. I forget discover to defend my point using the interest example. Lets turn in that derive Who Jeans moves 600, not 500 garments per shipment. Although the bend of garments changes, the total change-over hail would chip the same, because no additional retooling of the work would be necessary. The whole change-over process takes 3 hours construeing if the come in of garments is 200, 500 or 800. Furthermore, lets strictly theoretically assume that the association is able to achieve whatever extra energy and one batch is now composed of 150 garments instead of nose housedy garments. Still, although the total number of garments would vastly increase, the change-over be would be altered lone(prenominal) relegateially. The probability greet measured as a lost pie ce margin would slightly increase, tho the out-of-pocket greet would stay the same, as the wages of the employees and supplies be exit not change.Thus, it is clear that the number of garments is not the proper cost driver for the change-over costs. In my opinion the number of shipments would be a much wear cost driver for the change-over costs. Regarding the number of garments or the number of batches remember Who Jeans demands every(prenominal) shipment requires the change-over costs to be incurred twice. For instance, if 99 shipments were made, the total change-over costs would equal $351 * 198 = $69,498, because cardinal change-overs ($702) would not defy to be undertaken. Thus, the number of shipments clearly drives the discerpd costs. Un a exchangeablely the previous example with the number of garments per batch increasing to 150, the number of shipments fully drives the change-over costs. Every era the number of shipments rises or falls, the change-over costs chang e by the full amount of the two per-changeover costs which properly ponder the real situation. employ such(prenominal) a cost driver may be businessatic when the allocation of the change-over costs is analyzed. Nevertheless, I argue that those cost should be entirely allocated to the propriety jean lasting.The demand for the sto untestedashing go exceeds the gilds capableness. Thus, if the bet Who Jeans suffer was declined, the company would use the whole capacity for sto new-madeashing. However, if the offer was accepted the stonewashing processes would be in some way interrupted by the propriety jean turn backing. Each interruption, and and so individually shipment would require incurring the change-over costs twice. No reckon connected with stonewashing drives those costs. Regarding the number of batches or garments used in the stonewashing process each shipment necessitates the cost of $702. Therefore, I mean this cost should be associated with every shipmen t done by gauge Who Jeans. In appurtenance A I give birth the point of intersection profitability abstract using the number of shipment as the cost driver.Moreover, Mrs. Kelsey Bowser claims that the change-over costs should be wrap uped as product-sustaining costs. Nevertheless, I believe her opinion is wrong. I believe these costs should be on the batch level in the cost pecking order. Hence, I believe the initial abstract undertaken by Mrs. Bowser was correct, although the cost driver she selected was improper. Product-sustaining level costs could be defined as activities that argon needed to support an whole product line but atomic number 18 not performed every time a new unit or batch of products is produced Hilton 2010. Although the first part of the exposition applies to the change-over costs, it is clearly not the typesetters case when the aid part of the definition is concerned. The change-over costs pass to be incurred every time the shipments is delivered a nd the propriety denim finishing has to be done. Therefore, I believe these costs should be or else placed as the batch-level costs in the cost hierarchy.Batch-level costs are believed to arise from activities performed once for each batch or lot of products Zimmerman 2011. Since the change-over costs need to be incurred every shipment, placing them at this level in the hierarchy seems reasonable. 2. It is clear that before accepting the proposal several nonfinancial issues obtain to be considered in order to shed a reasonable ending. First, the wariness should think how accepting the Gues Who offer would affect the relations with the other clients. Since Guess Who requires the jean Finishing play along not to offer the especial(a) slip of finish to other customers, it is very likely that relations with other firms leave alone worsen. The dungaree Finishing Company has been cooperating with many companies for a long time. Therefore, those companies may dislike the fact t hat the new client contracts the special treatment, fleck such benefits could not be observed in their case, until now though they have been the customers for ages.Consequently, the denim Finishing Companys reputation may bounce and furthermore the firm may lose some of its customers that it had long condition relations established with. Accepting the Guess Who offer, as mentioned before, would require the blue jean Finishing Company to offer the certain time of finish only to Guess Who. Hence, the firm would be prohibited from providing other companies with this service. Before do the closing it should be analyzed if that could lead to authority losses in the future tense. For instance, although cooperating with Guess Who may be beneficial, the potential gains from offering that type of finish to other clients could be postgraduate. If so, the Denim Finishing Company should rather set aside the service to other firms. Naturally, before making such a decision it has to be determined if other firms would require the Denim Finishing Company to offer the service exclusively to them, like it is the case for Guess Who. go exclusive service to one company may outcome in other companies (not only potential clients as mentioned in the previous paragraph, but to a fault current ones) demands for exclusive treatment.If other clients, especially those who have been cooperating with the Denim Finishing Company for a long time, realize that it is possible to receive such a special treatment, they would likely claim for it too, as it could erupt them a competitive advantage over other firms in their industry. Thus, the Denim Finishing Company would doubtlessly face a big problem. It theoretically could increase the prices for the firms that demand exclusive service, but it could lead to losing those clients. Accepting or declining the Guess Who offer may also result in potential conflicts within the firm that have to be considered. For instance, Bruce Farr and who is against the offer may be so determined in defending his point of view that if the offer is accepted, he will decide to terminate his employment.However, he force be so valuable for the company that the gains from the cooperation with Guess Who would not compensate for the note measure added by Mr. Farrand. Moreover, some other conflicts could arise in the company by and by deciding either. Before making the decision it would also be recommended to analyze the potential influence the service offered to Guess Who could have on the motorcar. Since providing the finish would require constant and much retooling of the machine, it could negatively affect the lifetime of the machine. What is more, it is possible that the quality of services done by the machine would shrink because of those often changes. Hence, the satisfaction among clients could diminish and the high cost of purchasing new machine would have to be incurred soon.It also cannot be forgotten that the curren t demand exceeds the firms capacity and some of its clients already use services provided by other companies. Thus, if the Denim Finishing Companys has even less time for stonewashing, these clients can shift to competitors. Finally, it should be estimated what potential nonfinancial benefits could cooperating with Guess Who bring to the Denim Finishing Company. Guess Who is considered to be a company that offers innovative and premium products. Thus, being an important business quisling of such a firm could have a positive allude on the Denim Finishing Companys reputation. Consequently, it could attract new clients and encourage more companies to cooperate with the Denim Finishing Company. Moreover, successful cooperation with Guess Who Jeans could lead to extending the business relations with that company. For instance, it could outsource more of its exertion to the Denim Finishing Company.3. If I were gobbler Corcoran, I would undoubtedly have a few oral sexs for the comman d. First, I would aim almost all the problems mentioned in the two previous questions. As mentioned before, I believe that Mrs. Bowser did not place the change-over costs at the right level in the cost hierarchy. Hence, I would like to get to know why she decided to treat them as product-sustaining costs, while there are a lot of arguments supporting the idea to treat them as batch-level costs. Furthermore, the cost driver chosen by Mrs. Bowser is highly doubtful. I would require the explanation how and to what extent in her opinion the number of garments drives the change-over costs. Since I believe the number of garments is not the right cost driver, I would expect Mrs. Bowser for some other type of profitability analytic thinking, such as the digest presented in Appendix A. The summary presented at the meeting by the mastery could be misleading.Both Exhibit 3 and Exhibit 4 present information that is in my opinion inaccurate. Moreover, as it was analyzed in the second que stion accepting or declining the offer could lead to multiple nonfinancial outcomes that may play a significant role on the companys profitability. Hence, I would ask if such factors have been analyzed and if so, what possible impact they may have. I also believe that Tom Corcoran would be most interested in the total profit his company would have under both scenarios. Analyses presented at the meeting, as valuable as they might be, do not contain such information. For instance, they do not involve the facility-sustaining costs that the Denim Finishing Company has to incur. Hence, it would be recommended to present Tom Corcoran with the yearly profit the firm may earn. Moreover, I would ask Mrs. Bowser about the accuracy of her assumptions in Exhibit 4. She estimates that the costs of the proprietary process, as nearly as the price paid by Guess Who Jeans will not change during the year. However, it may not necessarily be the case. The analysis relies on historical costs that may not be appropriate for the future estimations.Thus, I would like to know if Mrs. Bowser took that aspect into account. Another question would regard the overhead pass judgment of the batch- and unit-level costs. The rates were estimated when only stonewashing was done. However, accepting the offer from Guess Who Jeans would require retaining from using the machine for 600 hours. This could likely result in antithetical overhead costs and consequently different overhead rates. The batch-level utility cost can be particularly problematic. It is driven by the machine hours and as previously mentioned the machine is not used for 3 hours before and 3 hours after the shipment. Furthermore, the case makes it unclear whether drying is also performed by the Unit 4. The per-garment utilities cost includes 3 hours for washing and 3 hours for drying.However, when the change-over is undertaken, the washing is not performed, because the machine cannot be used. Therefore, during the change-over the utilities cost is possibly dismay. This is especially important for the opportunity cost analysis. Since the case is absentminded information explaining the problem, if I were Tom Corcoran I would like to clear up it. Finally, I strongly believe that it would also be necessary to ask Mrs. Bowser about the facility-sustaining costs. Such costs are ignored in the controllers analysis. Nevertheless, they still affect the companys profitability. Hence, I would like to get to know how big those costs are.Moreover, the facility-sustaining costs could also be somehow influenced by the possible cooperation with Guess Who Jeans. For instance, the security or insurance costs could rise, since the service is supposed to be offered exclusively to that particular client. Therefore, the analysis of the capacity-sustaining costs would also be reusable. To sum up, if I were Tom Corcoran I would have many doubts about the controllers analysis. I would plausibly ask her to prepare yet anoth er presentation that includes my suggestions. However, if I were to make the decision, I probably would accept the Guess Who Jeans offer. The analysis in the Appendix A, although it does not include nonfinancial factors and may not properly reflect all the costs, clearly shows that such a scenario leads to increased profits.4. Activity-based cost is undoubtedly a useful tool that could help the attention to make the best decision. It is much more accurate that the conventional be systems. Distinguishing various activities and find out cost drivers relating to them helps to more precisely allocate the costs. Using one cost driver for all the amount of the overhead could create the situation where the collateral costs are not really driven by the particular cost. For instance, although direct roil hours might to some extent determine the value of the overhead, the influence may only be partial, especially regarding certain products. Using various cost drivers for various activit ies largely eliminates this problem. What is more, selecting particular cost drivers for individual activities enables taxing certain activities.This internal tax system gives an incentive to squeeze certain costs and therefore improve the companys efficiency. For instance, if machine labor hours are chosen as a driver for the labor operation there is an impulse to lower the number of machine labor hours which consequently results in reduced value of overhead, lower costs and higher profits. Under Activity-Based Costing the share of costs allocated directly to the products increases. Thus, the company better understand where its overhead costs go to. It enables the firm to identify the products that are not profitable and undertake relevant actions, such as lessen costs, raising the price or withdrawing the product. However, the cost hierarchy helps to make such decision regarding not only particular products, but also batches and product lines. This undoubtedly allows making d ecisions that are more profit-maximizing. Moreover, in the ABC the applicatory capacity is used. Therefore, it is possible to determine the unused capacity. Diminishing the unused capacity is definitely helpful in maximizing the profits of the company.Hence, Activity-Based Costing provides the management with the information necessary to make optimal decisions. To compare, the traditional costing systems do not give such a possibility. However, the ABC method also has some flaws that may result in making a non-optimal production decision. Some of those disadvantages could be observed in the previous questions. First, the system is believed to be complicated. As noticeable in the first question choosing the proper cost driver for the particular activity might be problematic. Selecting the wrong driver could lead to biased results and consequently the decision that is not profit-maximizing. Furthermore, trying to hold up the cost hierarchy may also be difficult, as shown in the exam ple of Mrs. Bowser from the Denim Finish Company.The results when the costs were determined as the batch-level where exclusively different than when they were analyzed to be product-level. Thus, such easily made mistakes could result in a non-optimal decision. Furthermore, as it could be seen in the second question Activity-Based Costing does not include any nonfinancial measures. Thus, even though pure financial values may show that a particular decision is profit-maximizing, it might not necessarily be the case. Other factors, such as e.g. loss of reputation could actually result in decreased profits. Finally, the ABC method requires gathering data from the whole company, often by means of interviews.Hence, there is a relatively big possibility that collected data is not perfectly accurate. To sum up, the Activity-Based Costing method is quite tried tool in making optimal production decisions, especially compared to the traditional costing systems. However, the system has to be carefully planned and implemented, because any mistakes could lead to inaccurate results. Choosing the wrong cost driver and improper assignment of the costs in the cost hierarchy may result in undesired errors. Furthermore, as useful as the ABC is, the management cannot rely solely on financial values provided by the method. Before making the decision all nonfinancial factors have to be considered. Only such a consideration combined with the information supplied by the properly designed and utilise Activity-Based Costing system can lead to the optimal production decision.5. The borderline costing analysis may undoubtedly be a useful tool in making an optimal decision. However, it has to be used carefully, because some of its suggestions may be misleading. This could also be observed in the analysis presented by Mrs. Bowser. The concerns are somehow parallel to the questions raised before. First, the fringy costing analysis does not include any nonfinancial factors. Hence, altho ugh the particular activity may seem profitable, it might not necessary be true. Second, the analysis is based on the historical, not the actual costs. The actual costs and price that Guess Who Jeans would be required to pay may differ over the time. Similarly, the application of the overhead depends on the estimates rather than the actual values. Thus, over or underabsorption may happen. Moreover, as mentioned before, after accepting the offer the overhead rates could change. Thus, the costs provided by the controller in the analysis might be inaccurate.As pointed out in the previous question the case is lacking the information about the possible decrease in the utilities costs during the change-overs. If that was true, the opportunity cost associated with the lost contribution margin on sales of 70,000 stonewashed garments would good increase. Considerably, the incremental profit from accepting the new offer would diminish. Another problem with Mrs. Bowsers analysis, as well as w ith all the marginal costing analyses is that they do not include the costs that do not change with the unit volume. However, such costs could also influence the decision. Although the analysis presented by the controller shows that accepting the offer would be highly profitable, the figures would not tone of voice so vastly appealing if the amount of capacity-sustaining overhead was included in the Exhibit. Furthermore, the presented analysis is only a short-term one. Nevertheless, before making a strategic management the management also has to consider the long-term perspective.The analysis shows that in the certain year the incremental profits from accepting the Guess Who Jeans offer would equal some particular value. The analysis only includes one year though. In the following years the profits could be lower and thus declining the offer could actually be a better decision. For instance, look that Guess Who Jeans needs the propriety denim finishing services for its new product s that are just to be introduced to the market. The client may expect the high demand for the new product in the first year. However, in the following years the demand for the product, and consequently for the Denim Finishing Companys services may shrink.Finally, the marginal costing analysis includes only one-case scenario. It assumes that the communicate and the actual number of shipments will be equal. However, it is not certain if that will happen. If some unexpected events happen the marginal costing analysis will not properly reflect the real situation. It cannot be forgotten that the marginal costing analysis is a simple and straightforward tool that can support the decision making. It is particularly useful when two products or divisions are to be compared. Moreover, it can give the management the basis for analyzing the opportunity cost of declining the Guess Who Jeans offer. However, the marginal costing analysis should be used carefully. I believe it should be treated as a supportive putz for decision making rather than the major source of information. Hence, if the controller alter a few things, the analysis could help to make the optimal, profit-maximizing decision.