Forrest Hill Paper Company

Date: February 11, 2013

Subject: Forest Hill Paper Company

From the case, we can figure out the Forest Hill Paper Company is a small, closely hold paperboard manufacturer that produces a board line of paperboard in large reels. FHPC competes in a cyclical economic environment, with upswings every three to four years. The current market is mature and declining with a recent trend towards plastic and a more environmentally friendly grade of recycled paperboard.

FHPC produced 20 kinds of paperboard and follow the lean manufacturing principle, and maintains minimal inventories. Market demand and the theoretically optimal production schedule are the factors to make production schedules. The strategy used by Forest Hill Paper Company to compete is to use a differentiation strategy. They have been offering a full range of both products and services, trying to create a niche based on service and rapid response to customer needs.

I think the most important challenge for Forest Hill Paper Company is cost allocation, there is a gap between allocated cost and actual cost, and the methods company used was not correct.

There are four overhead costs drivers for Forest Hill Paper Company: Large variability of output, the demand is bigger than the production capacity during a boom and decreases during down times; FHPC produces a huge variety of product that increase costs due to the processing required; Several steps with the machine causing costs to increase; Some costs are related to direct materials, while others depend on the batches.

As we know, Forrest Hill Paper Company is now using the simple costing system, and I think the material cost and indirect overhead costs were not allocated correctly. We should compare the simple costing system and ABC system to figures the most accurately amount.

In the other hand, we need to calculate a predetermined overhead rate using the total manufacturing overhead costs. We can calculate the appropriate manufacturing...