Aerotech and Cost Accounting

Introduction

Aerotech Corporation is a manufacturing company specializing in the production of circuit boards utilized in both communications equipment as well as aircraft radar systems. With two locations, a 20 year old plant located in Phoenix, Arizona and a newer facility located in Bakersfield, California, Aerotech Corporation utilizes two different production techniques; a more traditional operation at the older facility and a new, modernized operation at the newer facility. We will look at the different aspects of cost-management throughout both facilities.

Phoenix and Traditional, Volume Based Product Costing

Aerotech’s Phoenix office produces three different circuit boards, known as Mode 1, Mode II and Mode III, with three different price points, three different production levels with three different sets of costs. The units per circuit board are as follows: Mode I 10,000 units; Mode II 20,000; and Mode III 4,000. The sequence in which each is produced is identical. To identify the cost per unit, job-order product costing was used which included the following costs: actual direct labor, actual direct materials, manufacturing overhead as well as a predetermined direct labor rate based overhead of $33 per direct labor hour. After the calculation of each of these costs for each circuit board, the following costs were used: Mode I $209, Mode II $302, Mode II $126. To arrive at a retail price for these boards, each cost was multiplied by 125%, making the prices of each circuit board as follows: Mode I $261.25, Mode II $377.50 and Mode III $157.50.

Before too long, Aerotech noticed that their sales levels were not where the company had anticipated. Mode I, at a selling price of $261.25 performed as expected at that price point. Mode II, in an effort to boost sales due to foreign competition, reduced their selling price from $377.50 to $328.00. Even with this $49.50 per unit reduction in target price, sales for the production volume...