Destin Brass Case Analysis

Shravankumar Doosa

Managerial Accounting

Winter 2017        

Destin Brass Case Analysis

        Destin Brass was first founded 1984 in Destin, FL, with an expertise in high quality Brass products. Valves which are 24% of the revenue, pumps (55% of the revenue) and flow controllers (21% of the revenue). This paper explains what causes the 3 different costing methods to produce different results. The paper will also talk about possible strategic implications for each product and what actions Mr. Roland and his managers of Destin have to take in order to pull the company to profitable one.

The company went from producing valves to expanding the business to include pumps and flow controllers. Even though there is no competition in the valves business, there is a lot of competition in the pumps and flow controllers side. And after analyzing the financial situation of the company, the analysis came to a conclusion with three different cost accounting methods (Activity, Traditional, Revised).

So what causes the three different costing methods to produce such a different result in the unit cost. Using the information in the case, the estimated costs of the valves, pumps, and flow controllers are approximately $39, $81 and $147. These costs are based on the number of transactions that occur during receiving, packing/shipping, engineering and maintenance. Using the traditional method from exhibit 3, it shows that it causes pumps to be more expensive and flow controllers to be less expensive. The traditional method allocates overhead as a percentage of direct labor. So it does not acquire the receiving, handling which only go towards flow controllers. The overhead that is created for flow controllers is applied on pumps and valves. So activity analysis shows that pumps have a lower unit cost the overhead was not being allocated to pumps with this method. And pumps only cover about 19% of the direct labor, so that is another thing to keep in mind.

From exhibit 4, it shows that the revised method makes the valves and pumps to be more expensive than the flow controllers. Why such difference, it is because when using the revised method, it focuses on the material related overhead instead of labor. And flow controllers do not use much material compared to valves and pumps. The flow controllers appear less expensive because it is not allocating the labor costs and all that labor costs are going towards pumps and valves.

The strategic implications of the analysis show that the current process for the the flow controllers can be changed to reduce the unit cost of the flow controllers. By looking at exhibit 5, it can clearly show that if Desin Brass could reduce the production runs for the flow controllers from 10 to 1 per month, then this reduces the standard unit cost. Also if the number of transactions for receiving and handling from the flow controllers could be reduced form 100 this would immensely reduce the standard unit costs for flow controllers. Also by looking at the shipments made to their customers, it looks like it makes about 22 shipments of flow controllers and with only 22 shipments and looking at the regular unit costs, it is 4000 units/month. If this number of 22 can be reduced, then the standard unit cost of the flow controllers could decrease.

The value added analysis does not track overhead cost to where it was applied, whereas the revised method allocates overhead cost based on activities. The revised methods allocate cost on each product based from the cost of the material. It removed the set up labor cost from the total overhead and allocates it to each product line. Based on the activity system, it considers number of used set up labor hours, percentage of the transaction and number of machine hours. The activity based method looks like the best, accurate and effective method than previous costing systems because it covers each activity with their corresponding costs. Since flow controllers have the highest cost compared to the cost calculated using standard and revised systems. The selling price of pumps can be reduced while the company should increase the price of flow controllers.