Diamond Plating uses electroplating processes to coat products in either silver or gold, to individual customer specifications. Most of the company's work is obtained through a process of tendering, where the company submits a competitive bid (quote). Over the last few months, Diamond Plating has been very quiet as many of its tender bids have been unsuccessful. The Managing Director, Susan Sharma, is concerned that the business may not be able to continue operating if it does not improve its success rate with tenders.
The company has 2 production departments, Preparation and Coating, and the production requirements for different jobs can vary significantly. Some jobs require extensive preparation, and minimal coating, others require little preparation but multiple coats.
The following table describes the results of the five bids that the company submitted last month. The numbers in brackets after losses show where the company was ranked in the bid process.
|
Job no
|
Direct
labour
hours in
Preparation
|
Direct labour hours in Coating
|
Estimated
Direct
labour
hours
|
Overhead
cost of bid
|
Won/Lost
|
|
1
|
12,000
|
3,000
|
15,000
|
41,250
|
Lost (5th)
|
|
2
|
3,000
|
12,000
|
15,000
|
41,250
|
Won
|
|
3
|
15,000
|
|
15,000
|
41,250
|
Lost (3rd)
|
|
4
|
|
15,000
|
15,000
|
41,250
|
Won
|
|
5
|
7,500
|
7,500
|
15,000
|
41,250
|
Lost (2nd)
|
The pattern shown in the above table has been the same for the past months.
The company uses a predetermined overhead rate based on practical capacity, which is measured in Direct Labour hours.
The budgeted overhead for the year for the Preparation department is $540,000 (of which $180,000 is fixed and $360,000 variable) and for the Coating Department it is $1,440,000 (of which $360,000 is fixed and $1,080,000. Each department has a monthly practical capacity of 30,000 direct labour hours.
Required:
1. Write a report to Susan Sharma identifying the reasons why the company has been losing bids to its competitors
2. Develop an alternative costing system to use for bids to overcome this problem. Support your analysis with a detailed comparison of the existing and proposed bidding systems.