John Deere Component Works a

Central Issue

During the 1980’s, both farmland values and commodity prices were at the verge of hitting rock bottom. The high value of the U.S. dollar had reduced exports affecting both American farmers and farm equipment producers. John Deer Component Work’s, a subdivision of John Deere and Company, was no exception and soon began to see demand for their products decrease. Adding to this, JDCW had recently lost a number of bids and began to question the effectiveness of their current accounting system.

Lost Bids on High Volume Parts

John Deere Component Works was a captive subdivision specializing exclusively in the manufacturing of tractor parts. During the economic recession, JDCW saw an increase in the amount of excess capacity at their factory. Realizing their business could not wait for the economy to turn around, JDWC looked to their automatic turning machines as a promising niche. In addition to being versatile, these machines proved to be extremely efficient at high production volumes. With the turning machines in place, JDCW felt they were ready to make bids on contracts recently offered by Deere and Co. The division would be competing with other subdivisions of Deere in addition to a number of outside suppliers. JDCW went on to place bids for 275 of 635 parts offered.

Although the division had high hopes, JDCW was only awarded contracts for 58 of the 275 bids placed as they were the lowest bidder on a full-cost basis for these parts. The vast majority of the 58 bids won were on low-volume parts, not especially enticing to the division. JDCW hoped to win bids on the higher volume parts as doing so would have allowed them to take advantage of the high volume efficiencies of the turning machines. The loss of these bids forced JDCW to take a much closer look at their standard cost accounting system.

Standard Accounting System

The current accounting system consists of three cost pools for overhead allocation. The first is based on direct labor...