Bridgeton Industries

Bridgeton Industries Assignment

How did the calculation of gross margin by product potentially bias the study’s conclusions?

The product costs consist of both a variable cost and a fixed (overhead) cost. The variable costs reported in this cost system are appropriate but the fixed costs are not reported in association with the specific products. The current cost system allocates overhead costs once a year, as a function of direct labor dollars. This allocation strategy results in:

• Inaccurate allocation due to products at various levels of automation

• No incentive to reduce the cost of materials

• A situation where a reduction in production will result in less overhead allocated to the respective product

• Lack of incentive for employees to continually reduce their costs throughout the year as a result of the annual calculation of overhead allocation.

What are some other methods that could have been used to allocate overhead?

ACF should first separate out the individual elements of the overhead accounts and then reconsider the cost drivers associated with each overhead account. The plant needs to determine an appropriate link between the overhead and the products.

Once cost drivers are established for the individual elements of the overhead, ACF should determine the activity level for each project, with respect to the drivers, and assign the overhead as a function of the projects activity level.

A product specific allocation of the overhead expenses will allow for an accurate analysis of the cause and effect relationships of changes and/or improvements to a specific product line.

Does contribution margin by product suggest a different course of action after 1988? After 1990? Why?

Yes, the products should not have been outsourced because in 1989 the company outsourced the production of the muffler/exhaust and oil pans. These products represented about 50% of the company’s direct labor costs. In 1990, the...