Sippican Case

1 SIPPICAN CORPORATION CASE ANALYSYS 20229 Cost Management arrangement 2 Executive Summary ? confederation Overview ? Accounting rule ? payoff process ? Activities performed ? Q1. Should Sippican use a contri exclusivelyion adjustment approach? chronicle ? Q2. Capacity approach rates for resources ? Q3. ? a. Revised be and profits ? b. merchandise be and profitability synopsis with the smart aloneocation mode. Cause of the shifts in values. ? Q4. What actions should the perplexity take to improve Sippicans profitability? 3 Company overview Sippican is a company manufacturing hydraulic control devices alves, pumps and flow controllers Recent trends (March 2006) ? Valves boundary line remained at standard 35% ? Pumps Sippicans main business, perfect(a) permissiveness fell to 5% (below expect. 35%) ? scat controllers expense increase by 10% with no effect on demand Issue Sippican had to fight to competitors pumps price reductions to maintain volumes Decline in pr ofitability pre tax perimeter to less than 2% 4 Competitive scenario Sippican high-pitched quality fantastic design Loyal customer base Major supplier High volumes Commodities Major presence Customized Various typesIndustry Able to match Sippicans quality, but no bids for market sh are with price cuts SippicansReaction Stable 35% gross margin Valves Pumps Price reduction Price reduction & consequent origin in profitability More output signal runs and freight rates to meet demand + 10% Price increase w/o affecting demand come Controllers Much variety of types in the industry 5 Accounting method Simple cost accounting system , full cost method ? DM cost= price of components (annual agreement) ? DL= 32. 5$/h (fringe benefits are included) charged on std run times for each product ?OH allocated as % of product-run DL cost (185% current OH rate) Variable costs are but DL and DM Meeting to consider the possibility of adopting a share margin approach 6 output signal p rocess Purchase elevator car Assembly ? A unique product department ? Same equipments and crunch for all the 3 product lines ? Just in time Valves 4 components Standardized Large lots Pumps 5 components Standardized Products go to industrial distributors after assembly Flow Controllers Varied&customized to a greater extent components, more promote , more products runs 7 Activities Set up 2x 7. h/d shifts 20 days per calendar month each time batch components is machined in a mathematical product run 15 workers per shift (25% production workforce) 62 machines Workers simultaneously at more machines 45 workers per shift (production&assembly workers) 5,400$/month in operation(p) expense 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 & components price) 4 people over the 2 shifts 50 per sendment 8 bubble wrap and pack 14 workers per shift (tot28) 7. h/d shift 30 training 215 breaks *Production& assembly workers 2x 15 breaks 30 training 30 preventive mainteinance box and shipping New product design and development 9750$/m requital 7. 5h/d shift 8 Q1 Should executive adopt a parting margin approach? Yes Costs-volumeprofits analysis No Variable costsdm&dl significant contribution to oh Pricing decisions No account of all costs related to products Significant resolute costs JIT no train to incorporate inventories NO company cost structure significant fixed overhead costs and significant activities influencing the values of the final products the whole analysis will 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 number one wood allocation to cost pools. It will make the difference for perfoming a more accurate analysis 9 Q2 Compute capacity rates for resources Hrs/month Monthly cost* Production w orkers 20 $3. 900 corroborative workers 20 $3. 900 Engineers 20 $9. 750 Machines 20 $5. 400 x Paid hrs 7,5 7,5 7,5 Productive hrs 6 6,5 6 12 ? Monthly hrs great hundred 130 120 240 Cost per hr $32,50 $30,00 $81,25 $22,50 DL Set up Machines Rec&Prod Pack&Shp Eng wholes 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% *given by the text Q2 Product data March 2006 10 Product Lines Valves Pumps Flow Contr. DM social units 4 5 10 DM cost 16 20 22 DL h/unit 0,38 0,50 0,4 Machine h/unit 0,5 0,5 0,3 Set up h/unit 5 6 12 Production Units Machine hrs (run time) Production runs nockup hrs(labor&machine) of shipments Hrs engineering work Valves Pumps Flow Contr. 7500 12500 4000 3750 6250 1200 20 100 225 100 600 2700 40 100 200 60 240 600 supply 24000 11200 345 3400 340 900 Actual quantities per activity Activities Set up hrs Machine hrs R eceiving& control hrs case & 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 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 strand TOH* Machine related expenses Setup labor Setup Machine R&P Control P&S 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 Gross Margin GS&A Operating 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&DL 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& control hrs Packaging & 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 bespeak sell price Pl anned gross margin Actual marketing 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 economic 35%(old) vs (43%) No changes in expectations Lower cost allocated less activities dedicated to their production(std products, large lots) Pumps No meet expectations, but still profitable 20% Lower cost allocated less activities dedicated to their production (std products) Flow controllers No profitable -4% Higher cost many activities a nd 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 detailed and long production process for flow controllers .. 15 Q4. What actions should the management take to improve Sippicans profitability? Flow Controllers Flow controllers non 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(a) overheads TOH* Machine related expenses Setup labor Setup Machine R&P Control P&S Engeneering Potential solutions Impose a minimum bar 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&A