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Tijuana Bronze Machining Group Case Study As time goes by, it becomes clear to me that our competitions are crazy. Pumps are a major product in a big market for all of us, but with the prevailing price cutting mentality no one will be to sell pumps profitably as long as we all are forced to match each others’ lower prices. I guess we should be grateful that competitors don’t play the same foolish game in valves and flow controllers. Even with the 12 ½% price increases, we don’t see any new competition in flow controllers. -Herb Alpert, President Members of Group 8.0 Elmahie Elshikh Elajab Elshikh MR08 1123 Haidar Habib Mustafa MR08 1124 Kaziwa Kader KhalidMR08 1142 Safnimarina Safian MR06 1029

TBM Finale Reporte

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A final report for case study of Tijuana Bronze Machine company.

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Page 1: TBM Finale Reporte

Tijuana Bronze Machining

Group Case Study

As time goes by, it becomes clear to me that our competitions are crazy. Pumps are a

major product in a big market for all of us, but with the prevailing price cutting mentality no one will be to sell pumps profitably as long as we all are forced to match each others’ lower prices. I guess we should be grateful that competitors don’t play the same foolish

game in valves and flow controllers. Even with the 12 ½% price increases, we don’t see any new competition in flow controllers.

-Herb Alpert, President

Members of Group 8.0

Elmahie Elshikh Elajab Elshikh MR08 1123

Haidar Habib Mustafa MR08 1124

Kaziwa Kader KhalidMR08 1142

Safnimarina Safian MR06 1029

Page 2: TBM Finale Reporte

TABLE OF CONTENTS

List of Figures

Figure 1.0: TBM revenue based on the products ................................................... 5

Figure 2.0: Percentage of conclusion derived from the case study .......................... 21

List of Tables

Table 1.0: TBM performance ............................................................................... 6

Table 2.0: TBM Product Profitability Analysis ........................................................ 7

Table 3.0: Product cost for valves, pumps and flow controller ................................. 8

Table 4.0: Contribution margin for valves, pumps and flow controller ....................... 9

Table 5.0: Revised product costs ....................................................................... 10

Table 6.0: Comparison between standard costs and revised standard cost of TBM ... 11

Table 7.0: Product cost based on ABC approach ................................................. 12

Table 8.0: Product Profitability under 3 products costing system ........................... 13

1.0 Introduction ............................................................................................ 2

Background ...................................................................................................... 3

2.0 Performance ............................................................................................ 5

Company’s Effort ............................................................................................... 7

Calculation Report Analysis

1.0 Product cost per unit ............................................................................ 8

2.0 Estimation of contribution margins for 3 products .................................... 9

3.0 Revised Product Costs ....................................................................... 10

4.0 Product Costs of 3 products based on ABC approach .............................. 12

5.0 Comparison of reported income between 2 methods .............................. 13

6.0 Comparison of product profitability under 3 costing system .................... 13

7.0 Using ABC to re-evaluate JIT purchasing policy for flow controller ........... 14

3.0 Identification of Problems ..................................................................... 16

4.0 Recommendations ................................................................................. 17

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Managerial Accounting Group 8.0 | 1

Option 1: Drop Flow Controllers? ....................................................................... 17

Option 2: Or Raise Selling Price? ...................................................................... 18

Option 3: What about the pumps? ..................................................................... 18

Option 4: Reduction (Re-engineering) for Pumps? ....................................... 18

Option 5: How Are Valves Doing? ..................................................................... 19

5.0 Conclusion ............................................................................................. 20

References ................................................................................................... 22

Appendix ..................................................................................................... 23

The calculation part ........................................................................................ 24

Group Action Project ........................................................................................ 30

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Managerial Accounting Group 8.0 | 2

1 Introduction Tijuana Bronze Machining is basic case Activity-Based Costing (ABC) and

Activity-Based Management (ABM). There is enough richness to the fact.

Situation to create non-trivial calculations is rich enough to support

good discussion on the managerial implications.

This case is designed to familiarize with

the behavioral and technical variables that can aid or impede successful ABC

implementation. In this case, the casting role of a

business consultant was used to synthesize the case study's key

"change management" insights into a report that could be shared with co-

workers in an intranet-based knowledge management system.

Implementing change in an organization

is about ninety percent (90%)

cultural and ten percent (10%) technical. This is because the

organization dynamics, politics, and search for a champion that go on are

the real issues that make or break the project. One of the reasons to be able to

implement ABC successfully was because the right people became

champions.

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Within weeks of forming the company, Paul and his shop crew were

manufacturing valves that met or exceeded the needed specifications.

Alpert negotiated a contract with one purification equipment manufacturer,

and revenues soon were earned. Tijuana Bronze Manufacturing is a

producer of valves, pumps, and flow

controllers. Alpert, who had a long record of administrative successes,

back in 1984, established it. He partnered with Les Paul, a high quality

bronze boat fittings manufacturer and Mary Ford, an accountant with

manufacturing experience.

Since tolerances for water purification are small, maintaining them required

great labor skill and expensive machine controls. From the start,

Alpert either met or exceeded customers’ specifications. Shortly

after, TBM created an engineering

department and designed new products knowing that the same

manufacturing skills used in creating machine valves could also be used in

manufacturing pumps and flow controllers, since the valves alone did

not utilize TBM’s full available capacity. The same equipment and labor were

used for all three-product lines and runs were scheduled to match

customer-shipping requirements to eliminate finished goods inventory.

Their raw materials suppliers also agreed to use just-in-time deliveries

and products were packed and shipped

as completed.

He formed a partnership with les Paul, locally famous for the high-

quality bronze boat fittings he manufactured for fleet along the

Southern California and Baja coast. Alpert had recently retired from the

United States Air Force, where he had a long record of administrative

successes. The two then selected Mary Ford, an accounting with

manufacturing experience, to join them.

Paul was quick to analyze the nature of problems other manufactures were

having with water purification valves. Since the tolerances needed were

small, maintaining them required

great labor skill and expensive machine controls.

Background Tijuana Bronze Machining (TBM) was

established by Alpert in 1984 when

he purchased a moribund commercial machine shop on the California coast

south of San Diego. He had sensed an opportunity in a conversation with

the president of a large manufacturer of water purification equipment who

was dissatisfied with the quality bronze valves available.

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Regarding their products, valves

composed 24% of the company’s revenues and were created from four

bronze components. Paul had designed the machines that held each

component while it was machined

automatically. Precise machining was too expensive to compete in a

nonspecialized valve market and all monthly production of nonspecialized

valve market took place in a single production run, right before it was

shipped to each customer upon completion. Paul felt competitors

could match quality, but none had tried to gain market share by cutting

price. Gross margins amounted to 35%.

Pumps made up 55% of the revenues and manufacturing processes

were similar to valves but a lot less

intricate. The pumps were sold through seven distributors and orders

were stable as long as TBM matched competitive prices. The company

scheduled five production runs each month. Prices were under pressure

since the market was large and specifications were less exact.

Because there was no design advantage, it had no choice but to

match lower prices or give up its market share. Margins had fallen from

a planned 35% to 22%. Lastly, flow controllers created

21% of revenues. More components

were needed for each finished unit, but less labor was required. The

product was added to the line because it helped fill excess machining

capacity. They are distributed in 22 shipments to distributors and

customers. There is almost no competition in this market and even

when prices were raised 12.5%,

there was no effect on demand. Management is discussing possible

changes in their operations: for example, how to allocate overhead to

products. They are unsure whether they should continue to use traditional

cost accounting or activity based costing. One choice would be to

forego the overhead cost allocation altogether and instead charge it off as

a period expense. For overhead costs

that could not be traced directly to product lines, the other choice was to

allocate on the basis of transactions. Both have their advantages and their

disadvantages and they needed to weigh out both.

They decided to experiment with estimates to see how the product costs

might be affected. They began with discussing transactions and efforts

related to each type of overhead cost. They then created an analysis

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Figure 1.0: TBM revenue based on the

products

Valves24%

Flow Controller

21%

Pumps55%

2 Performance To analyze the situation of Tijuana

Bronze Machining, the past performance was taken

consideration. The valves, pumps

and flow controller become their main products and contribute the

company’s revenue as follows.

The standard gross margin has been setup by 35%. From the standard

percentage, the valves have been maintained at the standard with

revenue of 24%. So this means that their expense for the machining made

is successful although the TBM’s valves are too expensive to compete in

the nonspecialized valves market. No competitors could match TBM’s quality

in valves as the result of none of the

competitors tried to gain the market share by cutting the price.

As for the pumps, although the manufacturing process is similar to

valves only with a little less precision, the prices to distributors had been

under considerable pressure. The gross margin for pumps had fallen below the

company’s planned gross margin by

22% with revenue of 55%. One of the reason lead to this down turn is that the

company had no design advantage in pumps. So in order to survive they had

to match the lower prices or give up its market share.

The flow controller had regulated the

rate and direction of the flow of liquids by 42% gross margin up away from the

standard gross margin setup with 21% of revenue. This product was added to

help fill the excess machining capacity. The company identified that this product

had a good market as the flow

controllers had almost no competition in the market compared to other two

products. With that performance the flow controller prices was raised by

12.5% with no apparent effect on demands. The details of the

performance are depicted in the table 1.0.

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Table 1.0: TBM performance

(Using standard gross margin as the benchmark)

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Table 2.0: TBM Product Profitability Analysis

Company’s Effort As an effort of Tijuana Bronze Machining (TBM) company based on

their performance, what they had done so far can be depicted in the

answers of each questions provided. To begin with the product profitability

analysis is created to identify the potential problems they are facing.

What the company has done to

capture the essence of global competitive advantage is they come

up with the product profitability

analysis.From the table a statement concerning the competition in

pumps versus flow controller a raised.

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The Overhead calculation are as follows:

Machine depreciation $ 270,000

Set up labor

$ 2,688

Receiving

$ 20,000

Materials Handling $ 200,000

Engineering

$ 100,000

Package Shipping $ 60,000

Maintenance $ 30,000

Total $ 682,688

Total run labor = 9725 hrs x $16

= $155,600

Overhead rate = $682,688

$155,600

= 4.387455013 or 439%

* Manufacturing overhead = 439% x direct labor

Direct labor = $16 LPH x run labor hours per unit

Calculation Report Analysis As an effort to solve the problems of Tijuana Bronze Machining facing, the

calculation answers were made to analyze the options.

1.0 Product Costs per unit for valves, pumps and flow controllers Based on Exhibit 2 information, the calculation or workflows of the calculation

derivation are shown below:

Valves Pumps Flow Controller

Materials $16.00 $20.00 $22.00

Direct Labor based on run labor 4.00 8.00 6.40

*Manufacturing overhead 17.56 35.12 28.10

Total Standard cost $37.56 $63.12 $56.50

Table 3.0: Product cost for valves, pumps and flow controller

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In Exhibit 2, the measurements are built based on the direct and indirect costs and

on assumptions about the production and sales activity. Each unit of the product is charged for material cost based on the prices that the company’s pay for

components, and for labor cost based on the standard run labor times priced at

$16 per hour. Based on the price of direct labor $16 labor per hour times with the labor hours per unit for each product, the manufacturing overhead costs for each

product can de derived by multiplying the overhead rate (439%) with direct labor cost. With that calculation it shows how the amount stated in Exhibit 1 derived. For

Valves the standard unit cost is $37.56, pumps %63.12 and flow controllers are $56.50.

2.0 Estimation of Contribution Margins for the three products

To estimate the contribution margins for the three products, the contribution

margin principle is used.

Contribution margin =Sales - Variable Cost

Taking the information from Mary Ford’s conversation, the product profitability will

be measured at the contribution margin level, which is price less all variable costs. While the situation, only the short run variable cost is direct material.

Valves Pumps Flow Controller

Revenue $57.78 $81.26 $97.07

Variable costs (Materials only) 16.00 20.00 22.00

Contribution Margin $41.78 $61.26 75.07

Table 4.0: Contribution margin for valves, pumps and flow controller

After calculate the contribution margin, the Flow controller shows the most

contribution margin with $75.07 compare to valves and pumps are $41.78 and $61.26 respectively.

But the amount of the contribution margin should not disregard the overhead cost as because the marginal customers that willing to pay marginal prices are based

on marginal costs. From the outset, they have succeeded in part because they insisted on trying to maintain the 35% gross margin including allocated

manufacturing overhead. So in order to try the modern view of the proper way to allocate the cost question 3 leads to the revised product costs mentioned by Mary

Ford.

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*Material Related Overhead

Receiving $20,000

Material Handling $200,000

Total $220,000

Overhead Allocation rate on Materials Cost = $220,000

$458,000

= 0.480 or 48%

So material overhead for the 3 products = 48% x Material Cost

3.0 Revised Product Costs

Based on the information in Exhibit 2, the revised product unit cost per “More

Modern View”

Valves Pumps Flow Controller

Materials $16.00 $20.00 $22.00

*Material Related Overhead 7.68 9.60 10.56

Setup Labor 0.02 0.05 0.48

Direct Labor 4.00 8.00 6.40

**Other Overhead 21.30 21.30 8.52

Revised Standard Cost $49.00 $58.95 $47.96

Table 5.0: Revised product costs

The significant of the calculation was first to identify the material related overhead

(the cost of receiving and handling material) and allocated that to each product

line based on the cost of material.

The related overhead for the material of valves, pumps and flow controller are

$7.68, $9.60 and $10.56 respectively.

To calculate the revised standard cost, the other overhead is derived by calculating the overhead allocation rate times the machine hours. This can be depicted in the

work flow below. To get the revised standard cost, the total up of materials, material related overhead, setup labor, direct labor and other overhead is sum up.

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**Other Overhead on Machine Hour Basis

Machines Depreciation $ 270,000

Engineering $ 100,000

Packing and Shipping

$ 60,000

Maintenance $ 30,000

Total $ 460,000

Overhead Allocation Rate= $460,000.00

10,800 hrs

= $42.59 machine per hour

To calculate other overhead = $42.59 x Machine Hours

Products Standard Cost Revised Standard

Cost

Valves $37.56 $49.00

Pumps $63.12 $58.95

Flow Controller $56.50 $47.96

Table 6.0: Comparison between standard costs

and revised standard cost of TBM

After the calculation, the revised standard cost for valves is $49.00, while pumps are $58.95 and Flow controller is $47.96.The comparison calculation is depicted in

the table 6.0 below. The result of this revision made sense to the reason why the competitors are chasing lower prices in the pump market. The revised standard

cost for pumps is more than $4.00 below the present standard and would show a gross margin percentage of 27% compared to the current 22%.

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Table 7.0: Product cost based on ABC approach

Valves Pumps Flow Controller Total

Materials 120,000 250,000 88,000 458,000

Labor 30,000 100,000 25,600 155,600

Overhead:

Setup Labor 128 640 1,920 2,688

Receiving 600 3,800 15,600 20,000

Material Handling 6,000 38,000 156,000 200,000

Packing & Shipping 2,400 13,800 43,800 60,000

Engineering 20,000 30,000 50,000 100,000

Maintenance 10,500 17,400 2,100 30,000

Machine Depreciation 93,750 156,250 20,000 270,000

Total Overhead 133,378 259,890 289,420 682,688

Total Cost 37.78 48.79 100.76 1,296,288

From table 7.0, it shows that using Activity Based Costing (ABC) the valves total cost is $37.78, while a pump is $48.79 and the flow controller is $100.76. Based

from the ABC approach the cost can identify the costs pools, or activity centers in the company and assigns the costs to products and services (cost drivers)

based on the number of transactions involve in the process of providing a product. It is to be viewed to maximize shareholder value and improve the

company’s performance.

With the costing based on activities some advantages for the company is

identified:

Accurately predict costs, profits and resource requirements associated with changes in production volumes, organizational structure and resource costs.

Easily identify the root causes of poor financial performance. Track costs of activities and work processes.

Equip managers with cost intelligence to drive improvements. Achieve better Positioning of products

From table 7.0 too, the company detect that the flow controller product cost

much more compared to the standard cost and the range of high or lower amount is calculated for the following month, when the quantities produced and

sold, activities and costs were all standard.

4.0 Product Cost of the 3 products based on ABC approach

Based on the Exhibit 2 and Exhibit 3 information, the product costs for valves,

pumps and flow controllers is calculated using the “ABC” approach (Activity Based Costing) as follows:

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5.0 Comparisons of Reported Income between the Two Methods

After made a comparison between the two systems, there will be no difference.

Each month reflects two different methods of assigning the same actual costs to the three products. The total results for the company will be identical.

6.0 Comparison of Product Profitability under Three Costing System

Valves Pumps Flow Controller

Actual Selling Price $57.78 $81.26 $97.07

Standard Cost 37.56 63.12 56.50

Gross Margin 20.22 18.14 40.57

Gross Margin % 35% 22% 42%

Revised Cost 49.00 58.95 47.96

Gross Margin 8.78 22.31 49.11

Gross Margin %

15%

27% 51%

ABC Cost

37.78

48.79

100.76

Gross Margin 20.00 32.47 -3.69

Gross Margin %

35%

40%

-4%

Table 8.0: Product Profitability under 3 products costing system

The total reported results are the same for the company under the three methods. The accounting allocations for individual product lines change the gross

margins significantly. Product line profitability changes most significantly for flow controllers under ABC, dropping from the highest gross margin product to a

loser. Given the "complexity" reflected in Exhibit 3 for flow controllers, the activity/transactions costing system bears out the higher proportion of costs.

Therefore it is "better" than other systems. Also, although there could be differences in some cost allocations such as engineering and maintenance, 100%

of the costs are allocated on a reasonable resource consumption basis using ABC.

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7.0 Using "ABC" to Re-evaluate JIT purchasing policy for flow controller

According to the case study, Flow Controllers require ten components for each of

ten runs per month for a total of 100 receipts and 200 material handling transactions under the JIT arrangement with suppliers.

The total cost of both receiving and material handling is $220,000 ($20,000

receiving and $200,000 material handling). Receiving and inbound handling is $140,000 of this total

($20,000 + 0.6 x $200,000)

Under a "just-in-case" or JIC practice where all components for a month's Flow Controller production will be purchased together, the total receiving and material

handling costs will be only $14,000 (1/10 the cost). Some assumptions will be necessary for calculating inventory storage and carrying cost charge. The total

cost of flow controller components purchased each month is $88,000. Assume uniform production during the month so that the average inventory cost is

$44,000 (50% x $88,000). Assume carry costs are 100% per year, including a capital charge for space, space costs (maintenance, etc.), handling costs (labor,

etc.), carrying costs (insurance, taxes, etc.), and cost of funds. Applying a monthly carrying cost rate of 8.5% (100% / 12 months), the monthly storage

and carrying cost is $3,740 (.085 x $44,000). With a lower overall carry cost

percentage, this number is even lower.

Looking back at the calculation the company found out that:

Just-in-Time Costs: $140,000 Just-in-Case Costs:

Receiving & material handling $14,000 Carrying cost~4,000 18,000

Net savings per month using "JIC" 122,000

If TBM can reduce the receiving and in-bound material handling costs, there is a potential net savings of almost $1.5 million per year ($122,000 for 12 months)

by using monthly purchasing, versus JIT.

If we assume the $140,000 total costs are fixed, then there are no savings. But,

if all costs are totally fixed, who cares about any allocation scheme anyway?

"JIC" for Flow Controller Purchasing?

This alone lowers cost by ~$30.5 per unit ($122,000 / 4,000 units) which yields a 28% gross margin at current prices! [(97-70) / 97 = 28%].

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There seems no good logic for buying ten times per month, given the high cost

of receiving and in-bound handling. The basic ABC idea that receiving cost is driven by number of receipts, without

regard to the number of items being handled was considered. This is because, for valves, one receipt is 7,500 items. For flow controllers, one

receipt is about 400 items. The question of what is the nature of the process such that one transaction of

7,500 items costs the same to process as one transaction of 400 items has been debatable.

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Valves

It seems the company has no problem with Valves, even though the expense

of price machining to make valves too expensive but the merit for TBM’s

company is that the competitors don’t use cutting price strategy for valves.

After allocating ABC it will be clear that the company doesn’t need to change

their strategy for valves.

Pumps

Pumps are a major product in a big market; there are many rivals for this

product competing in the market. Cutting price by the competitors forced

TBM to cut pumps selling price in the market, but in the same time the

expense for pumps is high. The profit

cannot be seen if the company cuts its selling price as much as the competitors

do. The company’s planned gross margin for pumps is 35% but the actual

gross margin had fallen to 22% way to far from the standard margin.

Flow controllers

Even though TBM has added Flow

controllers to use idle capacity, but the expenses for this product is very high it

is more obvious when we allocate ABC system. It ensures that the company

makes losses on selling Flow controllers.

3 Identification of Problems Referring to the company’s data and the

conversation, their expenditure is very

high and getting less profits. The company makes three products: Valves,

Pumps and Flow Controllers.

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4 Recommendations The recommendations that can be suggested to the management were stated by

looking at how well the company’s doing.

How are they doing?

Looking back at the Planned Sales (assume volumes have not changed) calculation:

Valves (7,500 x 12 x $58) = $ 5.2 million

Pumps (12,500 x 12 x $97) = 14.6 million Flow Controllers (4,000 x 12 x $87) = 4.2 million

$24 million

Actual annual sales were only about $22 million at current prices. By assuming the

profit plan at planned prices produced an adequate return on investment; the current situation is about 2 million of negative economic income.

They need to be earning about $2 million more profit per year, somehow!

OPTION 1: Drop Flow Controllers?

As for the first option suggested to the management team, they can adding flow

controllers to the product line (to use idle capacity?) or doubled the manufacturing complexity (4 or 5 components versus 10 components).

But one thing that they might have to consider is, is this a reasonable thing to do in the factory?

Reason

If flow controllers were dropped, how much short-run cost-savings could be

realized? This question cannot be answered by ABC, which is not based on a variable cost and fixed cost dichotomy. For example, one half the engineering

costs are subjectively assigned to flow controllers. But will $50,000 of engineering cost be avoided if flow controllers were dropped?

This does not change the conclusion that on a fully allocated basis, flow controllers have a negative gross margin, let alone providing any bottom line profit.

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OPTION 2: Or Raise Selling Price?

Given the "no-competition" market for flow controllers, perhaps the selling price

could be increased gradually, but who knows? Who are the customers? What do they want? How much will they pay?

Given the uncertainty expressed by management in this market, there seems to be little harm in this pricing strategy, assuming management wishes to keep the

product line after seeing the ABC results. But, one must note that the higher the selling price, the more likely TBM will see some competition and/or reduced

demand.

And, if the purchasing policy is changed per Question 7, there is really no major

problem at all with flow controller profitability.

OPTION 3: What about the pumps?

The selling price for flow controllers increased more than 12% this past month

while the selling price for pumps decreased more than 16%.

The ABC analysis indicates that pumps still have the highest gross margin (40%) at the actual selling price. The gross margin would be 35% at a price of $75.06,

which would allow still further price cuts of $6.20 per unit. Given by the commodity pricing pressure on pumps and if 35% is really TBM's

necessary gross margin before SG&A expenses to earn an adequate rate of return, then a further 5% decrease to approximately $75 can be made without

harming the target gross margin. This assumes the ABC costs per unit do not

change.

OPTION 4: Cost Reduction (Re-engineering) for Pumps?

There is a lot of buyer power in this market, so TBM must undertake cost

reduction and re-engineering programs to be the low cost producer. The case says pumps require less precision manufacturing than valves. Pumps involve

only one more component than valves. There are approximately 58 workers on board and average wage (plus benefits)

is $16 per hour. At 25% benefits, an approximate wage rate is $13 per hour, which is on the high side for industrial manufacturing jobs along the Mexican

border at the time of the case.

Perhaps less skilled machinists could be used on the pumps (and flow

controllers)? Although automation is touted by management, direct labor represents 12% of the total manufacturing costs. Again, some cost savings may

be possible. Also, eight hours for a set-up!

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OPTION 5: How Are Valves Doing?

Apparently, the one valve customer is pleased with their quality and competitive

price. Competitors are not attempting price cuts. The case implies that

automation and efficient production processes are helping control costs and efficiency. But is it good strategy for TBM to be dependent on a single customer

for valves?

The ABC gross margin is 35% for valves so no action seems necessary to raise or

lower prices.

A question for management: Is there no growth in this market? Evidently, the

company makes pumps and flow controllers to fill out the production capacity. Can we really continue long-run with 24% of sales in a no-growth market with a

single customer? And all of these options of recommendations can lead to the conclusion.

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Based on the recommendations provided to the management team, the

ABC concept can be applied accordingly in certain situation. For option 1, they

should consider the impact of dropping the flow controllers, as the flow

controller are much related with the option 2 of raising the selling price. If

the purchasing policy is changed per Question 7, there is really no major

problem at all with flow controller

profitability.

While option 3 gives the company an opportunity to implement the ABC

concept as the ABC analysis indicates that pumps still have the highest gross

margin (40%) at the actual selling price. Then a decrease 5% in cannot

harm the target gross margin. This assumes the ABC costs per unit do not

change.

As for option 4, they should consider to do re-engineering or cost reduction to

the pumps. As per reasons mention in

the recommendation of option 4 they can not only save the cost of the setup

but also they can lure the buyer power in the market.

To go on for the option 5 on the valves, it is thinkable as the ABC gross margin

is 35% for valves so no action seems necessary to raise or lower prices.

This option strategy is on the growth of the market. Because evidently, the

company makes pumps and flow controllers to fill out the production

capacity.

5 Conclusion

The conclusion is that the idea of JIT is

always "good"- not when receiving and handling costs are as high as in this

case. While the concept of ABC is a

dynamic concept based on cost management, where areas ABC is a

static concept based on cost measurement.

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As a whole conclusion, this project work was on ABC calculation and the ABM managerial implications. it designed to augment managerial and cost accounting

study, while the case situation develops the ability to apply cost analysis to decision-making situations. Thoroughly tested and proven highly effective, the

cases provide challenging and fun problems that help build skills with managerial and cost accounting techniques. Based on real-life scenarios, the cases give the

opportunity to analyze the situation, decide which accounting concept is most appropriate, and apply the concept as the manager of a firm.

As a result here is the general conclusion on what the team gets in the end of

this case study:

Figure 2.0: Percentage of conclusion derived from the case study

Based on the case study, the team had found out most of the questions asked

revolving around the ABC approach calculation which is approximately 50% of the overall content of the case study. While another 30% revolved around on

how to determine the decision making by using the ABM concept and other 10% respectively were on how to analyze the data generally and the correlation of

team work to determine the solution for the case study.

50%

10%

30%

10% Calculation- ABC implication

Analysis of data

Decision making-ABM concept

Team work

Page 24: TBM Finale Reporte

22

REFERENCES

BOOKS

Drury, C. (2004). Management and Cost Accounting, 6th Edition. In C. Drury. Thomson.

Ray Garrison, R. G. (2008). Managerial Accounting, 12th edition. In R. G. Ray Garrison,

Managerial Accounting, 12th edition (p. 309). Boston: McGraw-Hill Higher Education.

Websites

(n.d.). Retrieved from stock.xchng - the leading free stock photography site: http://www.sxc.hu

(2004-2009). Retrieved from accountingcoach: http://www.accountingcoach.com/online-

accounting-course/36Xpg01.html

(2006). Retrieved from askmehelpdesk: http://www.askmehelpdesk.com

(2007). Retrieved from social publishing : http://www.scribd.com

(2009). Retrieved from valuebasedmanagement.net:

http://www.valuebasedmanagement.net/methods_abc.html

Page 25: TBM Finale Reporte

23

APPENDIX

Page 26: TBM Finale Reporte

Valves Pumps Flow Controller$16.00 $20.00 $22.00

4.00 8.00 6.4017.56 35.12 28.10

$37.56 $63.12 $56.50

The Overhead calculation are as follows:Machine depreciation 270,000$ Set up labor $ 2,688 Receiving 20,000$

$ 200,000 Engineering 100,000$

MaterialsDirect Labor based on run labor*Manufacturing overheadTotal Standard cost

Materials Handling

Managerial Accounting: Group Project

Activity Based Costing

Question 1Product Cost per Unit - Current System

$16 LPH x 168hrs

Engineering 100,000$ Package Shipping 60,000$

30,000$ 682,688$

Total run labor = 9725 hrs x $16

= $155,600

Overhead rate = $682,688$155,600

= 4.387455013 or 439%

439% x direct labor

Direct labor = $16 LPH x run labor hours per unit

* Manufacturing overhead =

MaintenanceTotal

$16 LPH x 168hrs

tbm_CASESTUDY

Page 27: TBM Finale Reporte

Valves Pumps Flow Controller$57.78 $81.26 $97.0716.00 20.00 22.00

$41.78 $61.26 75.07

Sales - Variable Cost

Valves $37.56 $49.00Pumps $63.12 $58.95Flow Controller $56.50 $47.96

Contribution margin =

Revised Standard Cost

Variable costs (Materials only)

Question 2Estimated Contribution Margin for the 3 products

Revenue

Contribution Margin

Products Standard Cost

Managerial Accounting: Group Project

Activity Based Costing

tbm_CASESTUDY

Page 28: TBM Finale Reporte

Valves Pumps Flow Controller$16.00 $20.00 $22.00

7.68 9.60 10.56Setup Labor 0.02 0.05 0.48Direct Labor 4.00 8.00 6.40

**Other Overhead 21.30 21.30 8.52Revised Standard Cost $49.00 $58.95 $47.96

Receiving $20,000Material Handling $200,000Total $220,000

$220,000$458,000

= 0.480 or 48%

So material overhead for the 3 products = 48% x Material Cost

**Other Overhead on Machine Hour Basis

*Material Related Overhead

Overhead Allocation rate on Materials Cost =

*Material Related Overhead

Managerial Accounting: Group Project

Activity Based Costing

Question 3Revised Product Unit Cost per "More Modern View"

Materials

270,000$ Engineering $ 100,000

60,000$ 30,000$

Total 460,000$

$460,000.0010,800 hrs

= $42.59 machine per hour

$42.59 x Machine Hours

Machines Depreciation

Packing and Shipping

To calculate other overhead =

Maintenance

Overhead Allocation Rate=

tbm_CASESTUDY

Page 29: TBM Finale Reporte

(a)

Activity Rate

(b)

Activity(a) x (b)

ABC Cost$16.00 7,500 120,000

$4.00 7,500 30,000

Overhead:

Setup Labor 0.02 128

Receiving 0.08 600

Material Handling 0.80 6,000

Packing & Shipping 0.32 2,400

Engineering 2.66 20,000

Maintenance 1.40 10,500

12.50 93,750

Total Overhead $17.78 133,378

Total Cost $37.78 283,378

(a)

Activity Rate

(b)

Activity(a) x (b)

ABC Cost$20.00 12,500 250,000

$8.00 12,500 100,000

Overhead:

Setup Labor 0.05 640

Receiving 0.30 3,800

Material Handling 3.04 38,000

Packing & Shipping 1.11 13,800

Engineering 2.40 30,000

Maintenance 1.39 17,400

12.50 156,250

Total Overhead $20.79 259,890

Total Cost $48.79 609,890

(a)

Activity Rate

(b)

Activity(a) x (b)

ABC Cost$22.00 4,000 88,000

$6.40 4,000 25,600

Overhead:

Setup Labor 0.48 1,920

Receiving 3.90 15,600

Material Handling 39.00 156,000

Packing & Shipping 10.95 43,800

Engineering 12.50 50,000

Maintenance 0.53 2,100

5 20,000

Total Overhead $72.36 289,420

Total Cost $100.76 403,020

Valves Pumps Flow Controller Total

120,000 250,000 88,000 458,000

Labor 30,000 100,000 25,600 155,600

Overhead:

Setup Labor 128 640 1,920 2,688

Receiving 600 3,800 15,600 20,000

Material Handling 6,000 38,000 156,000 200,000

Packing & Shipping 2,400 13,800 43,800 60,000

Engineering 20,000 30,000 50,000 100,000

Maintenance 10,500 17,400 2,100 30,000

93,750 156,250 20,000 270,000

Total Overhead 133,378 259,890 289,420 682,688

Total Cost 37.78 48.79 100.76 1,296,288

Materials

Machine Depreciation

Valves

Pumps

Materials

Labor

Flow Controller

Materials

Labor

Machine Depreciation

Machine Depreciation

Machine Depreciation

Managerial Accounting: Group Project

Activity Based Costing

Question 4

Products Costs Using Activity Based Costing

Materials

Labor

tbm_CASESTUDY.xlsx

Page 30: TBM Finale Reporte

Comparisons of Reported Income Between the Two Methods

There will be no difference. Each month reflects two different methods of assigning the same actual costs to the three products. The total results for the company will be identical.

Managerial Accounting: Group Project

Activity Based Costing

Question 5

tbm_CASESTUDY

Page 31: TBM Finale Reporte

$57.78 $81.26 $97.0737.56 63.12 56.5020.22 18.14 40.5735% 22% 42%

Revised Cost 49.00 58.95 47.96Gross Margin 8.78 22.31 49.11Gross Margin % 15% 27% 51%

ABC Cost 37.78 48.79 100.76Gross Margin 20.00 32.47 -3.69Gross Margin % 35% 40% -4%

System favor and reason why:

Standard CostGross MarginGross Margin %

The total reported results are the same for the company under the three methods. The accounting allocations forindividual product lines change the gross margins significantly. Product line profitability changes most significantly for flow controllers under ABC, dropping from the highest gross margin product to a loser. Given the "complexity" reflected in Exhibit 3 for flow controllers, the activity/transactions costing system bears out the higher proportion ofcosts.Therefore it is "better" than other systems. Also, although there could be differences in some cost allocationssuch as engineering and maintenance, 100% of the costs are allocated on a reasonable resource consumption basisusing ABC.

Actual Selling Price

Valves Pumps Flow Controller

Managerial Accounting: Group Project

Activity Based Costing

Question 6Comparison of Product Profitability Under Three product Costing System

tbm_CASESTUDY

Page 32: TBM Finale Reporte

GROUP ACTION PLANS

(Haidar; Elmahie; Kaziwa; Safni)

Managerial Accounting Group 8 | 30

No: MA_01 Objectives:

To understand the ABC and ABM concept To plan and recommending a new practice to better enhance the

previous norms of the organization- transition from traditional costing approach to modern costing approach

To present the strategic problems or opportunities identified in the organization which will give a direct impact on the goals of the unit organization.

Initiatives: Process of fulfilling the Managerial Accounting Group Project Paper requirement successfully.

Action Plans/Milestones Period Person responsible Output

1. The case study title

Tijuana Bronze Machining

Case study handed on 29/08/09 (Saturday)

All

Review and read the

case study Get the general idea

on what the case study discussed

2. Arrange a delegation

tasks and discuss the outlines.

First attempt

29/08/09-31/08/09 (Saturday-Monday)

All

(discuss in class and via online)

Rough Outlines for the

Case study (Refer to page 3)

3. Assigned the 2nd

meeting to report the first result.

4. Set up another meeting to report based on the tasks assigned.

5/09/09 or

6/09/09 (Saturday-

Sunday) [Yet to be

confirmed]

Expected ready by Friday on 4/09/09

Haidar

- Answer questions 1 and 2

- extra findings

Elmahie - Answer questions 3 and 4

- extra findings

Kaziwa - Answer questions 5 and 6

- extra findings

Safni - Group Action Plans - Answer questions 7 and 8

- extra findings

Group Action Plans Answers of questions

1 to 8 Extra findings data

Page 33: TBM Finale Reporte

GROUP ACTION PLANS

(Haidar; Elmahie; Kaziwa; Safni)

Managerial Accounting Group 8 | 31

5. Collection of data

Prepare the presentation

Findings from external sources (internet/books) to support

7/09/09 - 12/09/09 (Monday-Sunday)

Safni– Presentation

Templates and report wrap up

Elmahie – input all the data in slides

Haidar & Kaziwa- make sure the calculation answer presented in excel form

Tijuana Bronze

Machining Presentation slides

6. 3rd meeting discuss the

preparation of the report according to the tasks assigned.

13/09/009 (Sunday)

Time frame to do the report

(13/09-09 -26/09/09) Expected ready by 27/09/09

All

Tijuana Bronze

Machining Report

7. The compilation of the

final (the total page would be confirm later)

8. Appoint one presenter

27/09/09 (Sunday)

All

Final report Presenter Presentation slides

9. Recheck and correct Due till one day before

submitted date

Recheck with Prof and members of classmates- Are we in the right track?

11. Submit and present 25/10/09 (Sunday)

All Tijuana Bronze

Machining Case Study Complete

Barriers

Need to be concise and precise in developing the report Time to meet and discuss the project Need full understand the ABC concept and trivial challenge

calculation questions yang besar

Page 34: TBM Finale Reporte

GROUP ACTION PLANS

(Haidar; Elmahie; Kaziwa; Safni)

Managerial Accounting Group 8 | 32

OUTLINES FOR PRESENTATION & REPORT:

1. Company’s Background Description of the company history including:

o Business involved o The company’s performance (for benchmark)

2. Company’s Effort

What they have done to capture the essence of global competitive advantage

o The accounting calculation (questions given 1-7)

3. Identification of the current problems Dictation of what problems of managerial accounting practice

concerned List of the problems identified Problem to focus on- more or less on what they should done to solve

the problems o Traditional costing approach to Modern Costing approach o JIT policy o Product costing system

4. Suggestion Planning/ Recommendations/solutions towards the problems

The pros and cons of action project solutions. The impacts towards the company Supported analysis the recommendation- accounting for sustainability

5. Conclusion

The report would be more precise on the calculations and the reasons behind it (answering all the questions requirements)

Please feel free to add or delete as needed. Ideas on the outlines would be much appreciated. Kindly inform me what you think (agree or do not agree or want to change) about the dates provided on the table so that we can include

this group action plans in our report too.

THANKS and Happy Ramadhan