Sippican Case

1 SIPPICAN CORPORATION CASE ANALYSYS 20229 Cost Management System 2 Executive Summary ? Company Overview ? Accounting method ? increaseion work on ? Activities performed ? Q1. Should Sippican use a contribution bank approach? Explanation ? Q2. capableness greet rates for resources ? Q3. ? a. Revised be and pay ? b. Product make up and profitability analysis with the new whollyocation method. Cause of the shifts in values. ? Q4. What actions should the oversight lead to improve Sippicans profitability? 3 Company overview Sippican is a company manufacturing hydraulic restrain devices alves, pumps and flow controllers Recent trends (March 2006) ? Valves mete remained at standard 35% ? Pumps Sippicans main business, gross molding knock down to 5% (below expect. 35%) ? Flow controllers court increase by 10% with no effect on demand Issue Sippican had to react to competitors pumps expense reductions to maintain volumes Decline in profitability pre tax margin to slight than 2% 4 Competitive scenario Sippican High quality Unique invent Loyal customer base major supplier High volumes Commodities Major presence Customized Various typesIndustry Able to match Sippicans quality, but no bids for market share with expenditure cuts SippicansReaction Stable 35% gross margin Valves Pumps scathe reduction Price reduction &038 consequent decline in profitability More yield protracts and shipments to meet demand + 10% Price increase w/o affecting demand Flow Controllers more(prenominal) than variety of types in the industry 5 Accounting method simple-minded cost accounting system , full cost method ? DM costs= price of components (annual agreement) ? DL= 32. 5$/h (fringe benefits are included) supercharged on std run times for each product ?OH allocated as % of action-run DL cost (185% current OH rate) Variable costs are only DL and DM Meeting to consider the possibility of adopting a contribution margin approach 6 turnout process Purchas e forge assemblage ? A unique product department ? Same equipments and labor for all the 3 product lines ? Just in time Valves 4 components regularise Large lots Pumps 5 components Standardized Products go to industrial distributors after(prenominal) host Flow Controllers Varied&038customized more components, more labor , more products runs 7 Activities Set up 2x 7. h/d shifts 20 old age per month each time batch components is machined in a production run 15 workers per shift (25% production workforce) 62 machines Workers simultaneously at more machines 45 workers per shift (production&038assembly workers) 5,400$/month operating write down Productivity 6 per shift Production run Receiving and production control Orderind, processing, inspecting, moving batch componetnts to production runs 75 (regardless type of production run &038 components price) 4 people over the 2 shifts 50 per shipment 8 bubble wrap and pack 14 workers per shift (tot28) 7. h/d shift 30 training 2&21515 breaks *Production&038 assembly workers 2x 15 breaks 30 training 30 preventive mainteinance Packaging and expatriation New product design and development 9750$/m compensation 7. 5h/d shift 8 Q1 Should executive adopt a contribution margin approach? Yes be-volumeprofits analysis No Variable costsdm&038dl significant contribution to oh Pricing decisions No account of all costs related to products Significant fixed costs JIT no need to constitute inventories NO company cost structure significant fixed command overhead costs and significant activities influencing the values of the final products the whole analysis leaveing based on the contribution margin approach. The results which will be obtained will be influenced by the use of Time-driven ABC, with the right cost driver allotment to cost pools. It will make the difference for perfoming a more complete analysis 9 Q2 Compute capacity rates for resources Hrs/month periodical cost* Production workers 20 $3 . 900 Indirect workers 20 $3. 900 Engineers 20 $9. 750 works 20 $5. 400 x Paid hrs 7,5 7,5 7,5 Productive hrs 6 6,5 6 12 ? Monthly hrs 120 cxxx 120 240 Cost per hr $32,50 $30,00 $81,25 $22,50 DL Set up railcars Rec&038Prod Pack&038Shp Eng units 90 30 62 4 28 8 Monthly hrs 120 120 240 130 130 120 Hrs available Hrs utilize % Capacity used 10800 10700 99,07% 3600 3400 94,44% 14880 14600 98,12% 520 431,25 82,93% 3640 3483,33 95,70% 960 900 93,75% * habituated by the text Q2 Product data March 2006 10 Product Lines Valves Pumps Flow Contr. DM units 4 5 10 DM cost 16 20 22 DL h/unit 0,38 0,50 0,4 mould h/unit 0,5 0,5 0,3 Set up h/unit 5 6 12 Production Units Machine hrs (run time) Production runs Setup hrs(labor&038machine) of shipments Hrs design work Valves Pumps Flow Contr. 7500 one hundred twenty-five00 4000 3750 6250 1200 20 degree Celsius 225 100 600 2700 40 100 200 60 240 600Total 24000 11200 345 3400 340 900 tangible quantities per activity Activities Set up hrs Machine hr s Receiving&038 control hrs Packaging &038 lading hrs Engeneering hrs Pr Units x DLhrs Mhrs+set up hrs(machine) 75/60) x production runs (50/60) x ship + (8/60) x pr. Units Eng hrs Valves 2850 3850 25 1. 033,33 60 Pumps 6250 6850 125 1750 240 Flow contr 1600 3900 281,25 700 600 Total hrs used 10700 14600 431,25 3483,33 900 Q3 Valves Pumps Flow Controllers Tot $592. 500,0 $875. 000,0 $380. 000,0 $1. 847. 500,0 $212. 625,0 $453. 125,0 $140. 000,0 $805. 750,0 $120. 000,0 $92. 625,0 $250. 00,0 $203. 125,0 $88. 000,0 $52. 000,0 $458. 000,0 $347. 750,0 11 Q3. a Revised costs and profits for the 3 product lines Revenues VC DM* DL* Contribution Margin TOH* Machine related expenses Setup labor Setup Machine R&038P Control P&038S Engeneering $379. 875,0 $421. 875,0 $126. 499,0 $249. 374,1 $84. 375,0 $3. 250,0 $2. 250,0 $750,0 $30. 999,0 $4. 875,0 $140. 625,0 $19. 500,0 $13. 500,0 $3. 750,0 $52. 499,1 $19. 500,0 $240. 000,0 $253. 687,8 $27. 000,0 $87. 750,0 $60. 750,0 $8. 437,5 $21. 000,3 $48. 750,0 $1. 041. 750,0 $629. 560,9 $252. 000,0 $110. 500,0 $76. 500,0 $12. 937,5 $104. 498,4 $73. 25,0 realize Margin GS&038A direct Income % Gross Margin * Cost allocation slide 11 $253. 376,0 $172. 500,9 -$13. 687,8 $412. 189,1 $350. 000,0 $62. 189,1 22,31% 42,76% 19,71% -3,60% 12 Cost Allocation DM&038DL SQxSP Valves Prod. Units 7500 DM costs 16 DL costs 12. 35 Pumps 12500 20 16. 25 Flow Contr. 4000 22 13 OH Activities Set up hrs Machine hrs Receiving&038 control hrs Packaging &038 Shipment hrs Engeneering hrs Pr Units x DLhrs Mhrs+set up hrs(machine) (75/60) x production runs (50/60) x ship + (8/60) x pr. Units Eng hrs Valves 2850 3850 25 1. 033,33 60 Pumps 6250 6850 125 1750 240Flow contr 1600 3900 281,25 700 600 Total hrs used 10700 14600 431,25 3483,33 900 Capacity Costs Production workers 32,5 Indirect workers 30 Machines 81,25 Engineers 22,5 13 Q3. b Product costs and profitability with new cost assignment ? old cost assignment DL cost DM cost Man OH cost (185%) Std Unit cost Target change price Planned gross margin Actual selling price Actual Gross margin Actual gross margin% Valves Pumps $12,35 $16,25 $16,00 $20,00 $22,85 $30,06 $51,20 $66,31 $78,77 $102,02 35% 35% $79,00 $70,00 $27,80 $3,69 35% 5% Flow C $13,00 $22,00 $24,05 $59,05 $90,85 35% $95,00 $35,95 38% ? new cost assignmentDL cost DM cost Man OH cost Std Unit cost Target selling price Planned gross margin Actual selling price Actual Gross margin Actual gross margin% Valves $12,35 $16,00 $16,87 $45,22 $78,77 43% $79,00 $33,78 43% Pumps $16,25 $20,00 $19,95 $56,20 $102,02 45% $70,00 $13,80 20% Flow C $13,00 $22,00 $63,42 $98,42 $90,85 -8% $95,00 -$3,42 -4% Valves more productive 35%(old) vs (43%) No changes in expectations swallow cost allocated less activities dedicated to their production(std products, bear-sized lots) Pumps No meet expectations, but still fat 20% Lower cost allocated less activities dedicated to their production (std products) Flow controllers No profitable -4% Higher cost many activities and people used in their production Q3. B 14 The shift is caused by the Time-driven ABC method Costs are allocated to product lines which absorb more costs more dilate and long production process for flow controllers .. 15 Q4. What actions should the management take to improve Sippicans profitability? Flow Controllers Flow controllers not profitable as expected $253. 87,8 $27. 000,0 $87. 750,0 $60. 750,0 $8. 437,5 $21. 000,3 $48. 750,0 High setup costs (148000) compared to the other overheads TOH* Machine related expenses Setup labor Setup Machine R&038P Control P&038S Engeneering Potential solutions Impose a stripped quantity order to lower set up costs Gross margin -3,6 (how to convince customers to buy a minimum quantity? ) Production process improvement, with lower set up times 16 Q&038A