huron automotive

7/29/2019 Huron Automotive

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Huron Automotive

Group 5 Section C

Anubhav Tiwary (1211171)Deepankur Malhotra (1211178)Mithun Madhusudan (1211198)Saurabh Singh (1211221)Siddharth Agarwal (1211226)


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Background Huron Automotive Company

Selected vehicle parts supplier

Competed on basis of price

Focus on small volume parts

Carburetor & Fuel Injection Division Five production departments

Casting &

StampingGrinding Machining

Custom

WorkAssembly

Spare parts

Custom work

Standard products


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Present Costing Method

Single, plantwide direct labor hourly rate a single cost

center

Direct labor rate includes both direct labor and factory

overhead cost

Overhead cost calculated by combining all departments

No method available to assign overhead to each

department


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Proposed systems

Proposal 1

Department wise hourly costing rate

Labor hours and payroll costs

already traceable to departments

Some overhead items such as

supervisor salaries and equipment

depreciation traceable

Other overheads allocated using

suitable basis e.g. cubic feet of

space occupied for allocating

heating costs

Proposal 2

Based on normal volume of five

departments over the course of the

year

Normal volume estimated by

competent authority

Uses normalized departmental

rates

Labor cost same under two

methods

Difference in allocation of overhead

costs to various departments


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Comparison of costing systems

Present system has lower costs than either of the two new proposed

methods

Insignificant difference between either of the two proposed systems

Costs similar for individual activities

Actual costs depend on monthly variance in volumes

Casting /StampingGrinding

Machining

Assembly

Casting /

StampingGrinding

Machining

Assembly

First proposal Revised proposal

Costs for 100 unit batch of CS-29 carburetors


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Comparison of costing systems

Present system

Uses single cost center costs

proportional to all the work plant wide

Jobs could be overvalued based on

resources they consume

Cross subsidization between

departments, however total production

costs will remain the same irrespective

of method of costing used

System 1 & 2

Do not differ much from each other; average overhead

cost in Exhibit 2 is similar to the normal calculated rates

in Exhibit 4

Largest proportion of costs are machining and assemblyfor which there is only a slight difference (5% for

assembly and 2% for machining) in calculated rates

System 1 uses July actual, while system 2 uses

estimated rates based on normal volume. Actual cost

differences between systems will depend on the

variance in volumes across months.

Since system 2 uses estimated rates for a fixed business

cycle, it provides a more stable pricing basis


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Recommendation Proposal 2

(normal rates)Sales manager

Changing costing system

impacts prices

Profits/loss within product line

immaterial as long as overall

product line remains profitable

Response - New system

helps determine exact cost of

each product, division can

continue to produce loss

making items, helps identify

reasons for loss making

products

Director Financial Planning

Rates changing every month,

products begin to show losses

in spite of sales holding up.

Is the product really losing

money or is it because it cant

carry share of idle capacity?

Response - Distribute costs of

idle capacity according to

actual costs of jobs/margins of

jobs. Does not imply that only

certain jobs will start showing

losses

Production manager

Cannot charge accurate costs

in machining/assembly in

periods of under capacity

Response - Overhead costs

in proposal 2 have been

arrived at based on a normal

estimate of volume.

Therefore, costs of over/under

capacity should average outover a period.


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Thank You

huron automotive

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