Blackheath Manufacturing

CASE 1:

ZAUNER ORNAMENTS

Table of Contents

I. CASE SUMMARY 2

II. POINT OF VIEW 2

III. STATEMENT OF THE PROBLEM 2

IV. FRAMEWORK OF ANALYSIS 2

V. ANALYSIS 2

VI. DISCUSSION OF RESULTS AND RECOMMENDATION 4

VII. APPENDIX 5

VIII. REFERENCES 9

I. CASE SUMMARY

Chia-yi Yu, the new controller of Zauner ornaments, decided to research Zauner’s current costing methods. She approached her senior analyst, Yung Chen, to prepare an analysis of unit-product costs for each of Zauner’s products, namely small glass ball ornaments, large glass ball ornaments, and specialty glass ball ornaments.

Using information from the sales department, Chen calculated the cost per box using traditional volume-based costing system and as a result, small glass ornaments’ cost is more than twice higher than its selling price, which means the company is losing money. David Metz, the directory of Operations, analyzed the results and suggested to redo the calculations and to try allocating overhead to each product based upon direct materials and direct labor. Chen calculated the cost per box using Metz’ suggested approach and found that product costs are below current sales price. Yet, Chia-Yu was not fully convinced of this approach and realized that activity-based costing (ABC) system might reflect Zauner’s product costs more accurately and serve as a basis for better product-pricing decisions.

II. POINT OF VIEW

The analysis of Zauner Ornaments’ cost allocation per product will be taken from Chia-yi Yu’s perspective, being the new controller, who aims to review and provide more accurate costs and improve product-pricing decisions.

III. STATEMENT OF THE PROBLEM

The problem is to choose among traditional volume-based costing, direct materials-and-direct labor-based costing and activity-based costing that will reflect Zauner’s product costs most accurately with the goal of improving product-pricing decisions.

IV. FRAMEWORK OF ANALYSIS...