Case Scenario:
Huge Company's tooling business unit (TBU) manufactures metal and carbon-fiber parts for the company's major products. TBU's principal focus in recent years has been to schedule its resources properly, but its manager is concerned that the current method of costing the unit's work is causing other business units to send it work that does not use TBU's strengths to the company's overalll advantage. TBU computes a combined labor and overhead cost per labor hour and charges each job based on the number of labor hours used. This labor-based charge is added to materials cost to calculate the total job cost.
TBU works for internal customers exclusively, and there is no consideration to allow it to seek outside work. Other business units are allowed to use external suppliers, however, and are encouraged but not required to use TBU, which has 19 work centers, each of which uses computer-controlled machines and processes.
TBU uses two basic types of machines: (1) 6 multi-axis (M) machines, which allow complex parts to be rotated in multiple directions while being completed without removing the part and (2) 13 single axis (S) machines, which are used for parts that do not have to be rotated more than once to be completed. The M machines were just purchased to replace 6 (S) machines. They are three times as expensive to operate as (S) machines. Each machine is considered a work center and is available 6,000 hours (three shifts) per year.
TBU's employees are highly skilled and are among Huge Company's highest paid hourly workers. They are qualified to work on either type of machine and any type of job. As a practical matter, employees tend to work on machines and jobs that interest them most, but TBU management encourages workers to diversify their efforts. TBU employees are available 2,000 hours per year.
Stainless steel (SS) and aluminum (A) parts are machined from metal stock. Carbon fiber (CF) parts are made by laminating carbon fiber and plastic resins. Carbon-fiber materials are much more expensive and require more labor.
Last year's labor cost and overhead (which includes the costs of management and equipment but excludes materials costs) follow:
Labor (1,000 employees) $ 90,000,000
Overhead
Equipment (19 work centers) 190,000,000*
Management and engineering 20,000,000
Total $300,000,000
The following are the data for and characteristics of five representative jobs:
|
Job
|
Equipment
|
Machine Hours
|
Materials Type
|
Weight (kg)
|
Materials Cost
|
Labor Hours
|
|
1
|
M
|
7.50
|
SS
|
300
|
$ 30,000
|
22.50
|
|
2
|
S
|
10.00
|
CF
|
200
|
100,000
|
160.00
|
|
3
|
M
|
8.75
|
A
|
350
|
28,000
|
21.00
|
|
4
|
S
|
12.50
|
A
|
500
|
40,000
|
120.00
|
|
5
|
S
|
5.00
|
SS
|
200
|
20,000
|
60.00
|
Required to do:
1. Compute the costs of each job using the current cost system.
2. Recommend an alternative cost system that recognizes additional differences among jobs.
3. Recompute the job costs using your alternative cost system.
4. Explain differences in decision making at TBU.
5. Identify TBU's internal customers that might be influenced by the use of the alternative cost system.