Case Study – Tankmaster Manufacturing Company

Case study – Tankmaster Manufacturing Company.

Don´t understand why profits are falling when selling higher margins.

Product costs would be more meaningful if they´d be absorbed on machine hours.

There will be a problem if productions don´t get control of the cost increases.

Need more specialist engineers to monitor changes, this do not cheap.

New parts coming with huge material costs and materials handling.

Need many more set-ups per shift - the overtime is high.

Difference between standard products and specialized products overhead cost is: £322,700 – £276,600 = £46,100

This calculation gives us useful information as a ground for advisement. The difference between standard products and specialised products overheads becomes lower by absorbing overheads on the bases of machine hours. We know that manufacturing of standard products requires more machine hours than specialised products. But the difference between the products should still be lower than it is with calculating allocation base in labour-hours. Labour-hours are as mentioned a small part of production. Therefore, switching to machine-hours as the overhead allocation base will provide more accurate output (cost) and company can high the profit.

In this situation a logical response is to start allocating manufacturing overhead cost based on machine-hours as the overhead recovery base. Our advice to Davina is that company should allocate manufacturing overhead cost based on machine-hours because of the growing automation and less need for labour hours in production. As the accountant in the company said, this would be more meaningful than allocating overhead cost by using labour-hours.

As mentioned previously, the company is using traditional costing method which is based on a traditional costing system where manufacturing overhead is assigned based on the volume of cost drivers, such as direct labour, machine hours or units. Davina is not able to get more accurate product cost by using this method. In this case an Activity-based costing will provide more accurate cost view for the company. With the help of ABC, company will be able to allocate the rising overhead costs in a more logical manner for both standard and specialised products. This may help as to trace cost better and will give us an advice on how to reduce the costs and gain more profit as Davina fears are about in the current situation.