Bridgeton Managerial Accounting

This analysis will review some of the details of the Brighton case and provide pertinent comments and recommendation with regards to the decision on whether to keep or outsource the production of manifolds.

Overhead allocation rate (OAR) observations

1987

Direct Labor $24,682

Total Overhead $107,954

Overhead Margin 437.38%

The OAR when using model year 1987 budget numbers is 437.38%. The OAR of 435% used for the study was based on the costs that consultants obtained from the production cost system during the 1987 model year. The difference between the two numbers is small and may have resulted from consultants using historic averages or due to rounding errors. Both margins are estimates, not based on precise numbers.

Changes in overhead allocation rate

1987 1988 Delta 1989 1990 Delta

Direct Labor (DL) $ 24,682.00 $ 25,294.00 2.48% $ 13,537.00 $ 14,102.00 4.17%

Overhead (OH) $ 107,954.00 $ 109,890.00 1.79% $ 78,157.00 $ 79,393.00 1.58%

OAR 437.4% 434.5% -0.67% 577.4% 563.0% -2.49%

The OAR decreased by 0.67% from 1987 to 1988, and by 2.49% from 1989 to 1990. We can observe that in both cases DL increase was significantly higher than increase in OH costs (2.4% vs. 1.79%, and 4.17% vs. 1.58%). Also we can see that higher increase in DL is accompanied by lower increase in OH. This points us to the conclusion that ACF’s OH costs contain both fixed and variable component, and that likely the fixed portion is weighted heavier than the variable portion. We can speculate that increases in DL costs in both cases occurred due to inflation, labor union pressure, production volume growth, or a combination of the above.

1988 1989 Delta

Direct Labor $ 25,294.00 $ 13,537.00 -46.48%

Overhead $ 109,890.00 $ 78,157.00 -28.88%

Overhead Rate 434.5% 577.4% 32.89%

The OAR from 1988 to 1989 increased by 32.89%, accompanied by a significant drop in DL and OH costs. This was the result of ACF...