CASE DETAILS WireBuzz Ltd has been operating in the competitive electronics industry for over twenty years....

  

  

  

  

  

  
 
 
 
 

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CASE DETAILS WireBuzz Ltd has been operating in the competitive electronics industry for over twenty years. The company produces a range of electronic systems and a few years ago, began manufacturing several different types of wall key pad systems where now two of these, account for the majority of the company's sales. This case focuses on these two types of wall key pad systems: the simple push button pad (PBP) and the LCD wireless touchscreen pad (LWTP). PBP has been the more common product in the industry for several years. The market for this product is quite competitive and price sensitive. WireBuzz plans to sell 62,000 units in the 2021/2022 year at $170 each. LWTP is a recent addition to the Company's product line. This product is different to PBP namely, it incorporates technology that is more sophisticated and the materials used in its production are different to those used for PBP. As such, management has decided to sell LWTP at a premium price. The sales budget for 2021/2022 includes the sale of 35,000 units at $340 each. In addition, there is no beginning or ending inventory budgeted for the year. The management team at WireBuzz usually meet to discuss key issues affecting the company. Since the company's profitability over the couple of years has not met expectations, the decision was made to schedule monthly meetings. Hence, beginning with the current month the next few meetings will focus on discussing strategies to increase the company's overall profitability in 2021/2022. In the first meeting, the main topic that management focused on was how to spend the sales and promotion dollars for 2021/2022. During the meeting Kane Fang, the National Sales Manager, said "I believe the market share for PBP could be 2 expanded, by concentrating WireBuzz's promotional work in this area". In response to this suggestion the Production Manager, Toni Price shook her head and said, "I disagree. I believe the company should go after a bigger market for LWTP. The costing sheets that I get show the contribution from LWTP is greater than the contribution from PBP. As we get a premium price for LWTP, focusing on expanding its sales should help overall profitability". WireBuzz currently uses a traditional costing system. Budgeted direct materials costs are $10,830,000 in total, for production of the two types of wall key pads with $5,580,000 being the total budgeted cost for PBP direct materials. Direct labour is budgeted at $20 per direct labour hour (DLH). The company expects to use 4 DLH and 2 machine hours (MH) for each LWTP unit and 1.5 DLH and 1 MH for each PBP unit produced. This traditional costing system was developed a number of years ago when the company first commenced operations and uses three types of manufacturing overhead: material-related overhead, variable manufacturing overhead and machine-related overhead. WireBuzz applies a material handling charge at 15 percent of direct materials cost, which is not included in variable manufacturing overhead. Variable manufacturing overhead is applied on the basis of direct labour hours. For 2021/2022 the budgeted variable manufacturing overhead rate is $5/DLH. In addition, machine-related overhead is applied on the basis of MH and is budgeted at $22/MH. Jane Web the Company's Financial Controller, who recently joined the company, had previously worked in another company that used a different costing system which was predominately based on the principles of Activity Based Costing 3 (ABC). Upon having reviewed WireBuzz's past financial reports and costing information Jane became sceptical about the accuracy of the costing data for both PBP and LWTP. Based on her experience with ABC and the uncertainty she had, Jane made a recommendation to the management team during the first meeting. She recommended that before the group proceeded with the discussion about allocating sales and promotional dollars to individual products; it may be worthwhile to look at these products on the basis of the activities involved in their production. Jane further explained, "using this information, we can calculate an activity-based cost for PBP and LWTP and then compare each to the traditional costing we have been using". She also suggested at assessing the activities involved in production. The management team all agreed that Jane and her team should go ahead with the activity analysis she suggested and present back the results. Subsequently, Jane and her team conducted an activity analysis and identified that the original three overhead categories used under the traditional costing system involved a series of different activities. Approximately 20% of material related overhead involved the procurement of material components; 18% involved the scheduling of production for the PBP and LWTP wall key pads; 15% involved moving materials around the production facility and the remaining overhead was incurred for packaging and shipping of the wall pads. Quality control accounted for 45% of the variable manufacturing overhead and involved ensuring that finished wall pads conformed to the design specifications for each type. The other variable manufacturing overhead comprised of: setting machines up in preparation for production; disposing of waste; and ordering and maintaining general supplies, which are used in producing the completed wall pads. These were incurred in the ratio of 0.7: 0.25: 0.05 respectively. Machine- related overhead, was now considered a conversion cost, and involved machine soldering of the PBP and LWTP wall key pads and inserting material components into each PBP and LWTP wall key pad. The cost of soldering the wall pads 4 amounted to $634,800. Inserting material components into the wall key pads was a different process, where some of the material components were inserted by machines, and accounted for 30% of the activity cost pool. Other material components involved a more manual insertion process where a number of employees manually inserted individual components into the wall key pads. As a result of this analysis, Jane concluded that the direct labour category was no longer relevant and she also established that the only cost that would remain the same under both the traditional costing method and the ABC method is the cost of direct materials. Jane and her team also identified information specific to PBP and LWTP. Each PBP wall key pad required two machine setups whilst each LWTP wall key pad required eight setups. A total of forty-six components were used to produce the PBP and LWTP wall key pads. Of these, thirty-four specific components were used in the production of each LWTP wall key pad and fifteen of these components were manually inserted onto the LWTP wall key pad by assembly line employees. The remaining components were used in the production of each PBP wall key pad and assembly line employees manually inserted five of these components onto each PBP wall key pad. Materials were moved three times for each PBP wall key pad and nine times for each LWTP wall key pad. Both types of wall key pads passed an inspection process which involved a total of ten inspections where 20% of these were for each PBP wall key pad and the remaining inspections were for each LWTP wall key pad. A total of 0.60kg of waste would arise from the production of one PBP wall key pad and one LWTP wall key pad, and approximately 15% of this came from the production of each PBP wall key pad. As part of the analysis, Jane and her team also identified a number of activity cost drivers. These are in Figure 1 below. 5 Figure 1: Identified Activity Cost Drivers COST DRIVER Number of Wall Key Pads Number of Components Number of Material Moves Number of Setups Number of Inspections Number of Insertions** Kilograms of Waste ** manual insertions **machine (automated) insertions (CMA Adapted) REQUIREMENTS: Your task is to assist Jane and the management team by providing advice on the current situation and the future direction of the company. You are expected conduct research and analysis to prepare a report for the next management meeting, which addresses the requirements below: 1. WireBuzz's management team have agreed that the company needs to become more focused in implementing activity-based Costing (ABC) and also activity-based management (ABM) and have asked your project team to research this further with respect to product costing analysis. Firstly, you will need to conduct research and discuss, in general, how ABC and ABM can be used to gain a competitive advantage. Secondly, you should identify and discuss in detail two Australian or US, publicly listed manufacturing companies (include the company code of each) which have implemented ABC and ABM analysis explaining why the approach was chosen. In addition, discuss how these companies have used this approach and also discuss what the overall outcome has been for each company. 2. Based on WireBuzz's current traditional costing system, as outlined in the case, calculate the total cost and unit cost expected for the PBP and the LWTP wall key pads. CASE DETAILS WireBuzz Ltd has been operating in the competitive electronics industry for over twenty years. The company produces a range of electronic systems and a few years ago, began manufacturing several different types of wall key pad systems where now two of these, account for the majority of the company's sales. This case focuses on these two types of wall key pad systems: the simple push button pad (PBP) and the LCD wireless touchscreen pad (LWTP). PBP has been the more common product in the industry for several years. The market for this product is quite competitive and price sensitive. WireBuzz plans to sell 62,000 units in the 2021/2022 year at $170 each. LWTP is a recent addition to the Company's product line. This product is different to PBP namely, it incorporates technology that is more sophisticated and the materials used in its production are different to those used for PBP. As such, management has decided to sell LWTP at a premium price. The sales budget for 2021/2022 includes the sale of 35,000 units at $340 each. In addition, there is no beginning or ending inventory budgeted for the year. The management team at WireBuzz usually meet to discuss key issues affecting the company. Since the company's profitability over the couple of years has not met expectations, the decision was made to schedule monthly meetings. Hence, beginning with the current month the next few meetings will focus on discussing strategies to increase the company's overall profitability in 2021/2022. In the first meeting, the main topic that management focused on was how to spend the sales and promotion dollars for 2021/2022. During the meeting Kane Fang, the National Sales Manager, said "I believe the market share for PBP could be 2 expanded, by concentrating WireBuzz's promotional work in this area". In response to this suggestion the Production Manager, Toni Price shook her head and said, "I disagree. I believe the company should go after a bigger market for LWTP. The costing sheets that I get show the contribution from LWTP is greater than the contribution from PBP. As we get a premium price for LWTP, focusing on expanding its sales should help overall profitability". WireBuzz currently uses a traditional costing system. Budgeted direct materials costs are $10,830,000 in total, for production of the two types of wall key pads with $5,580,000 being the total budgeted cost for PBP direct materials. Direct labour is budgeted at $20 per direct labour hour (DLH). The company expects to use 4 DLH and 2 machine hours (MH) for each LWTP unit and 1.5 DLH and 1 MH for each PBP unit produced. This traditional costing system was developed a number of years ago when the company first commenced operations and uses three types of manufacturing overhead: material-related overhead, variable manufacturing overhead and machine-related overhead. WireBuzz applies a material handling charge at 15 percent of direct materials cost, which is not included in variable manufacturing overhead. Variable manufacturing overhead is applied on the basis of direct labour hours. For 2021/2022 the budgeted variable manufacturing overhead rate is $5/DLH. In addition, machine-related overhead is applied on the basis of MH and is budgeted at $22/MH. Jane Web the Company's Financial Controller, who recently joined the company, had previously worked in another company that used a different costing system which was predominately based on the principles of Activity Based Costing 3 (ABC). Upon having reviewed WireBuzz's past financial reports and costing information Jane became sceptical about the accuracy of the costing data for both PBP and LWTP. Based on her experience with ABC and the uncertainty she had, Jane made a recommendation to the management team during the first meeting. She recommended that before the group proceeded with the discussion about allocating sales and promotional dollars to individual products; it may be worthwhile to look at these products on the basis of the activities involved in their production. Jane further explained, "using this information, we can calculate an activity-based cost for PBP and LWTP and then compare each to the traditional costing we have been using". She also suggested at assessing the activities involved in production. The management team all agreed that Jane and her team should go ahead with the activity analysis she suggested and present back the results. Subsequently, Jane and her team conducted an activity analysis and identified that the original three overhead categories used under the traditional costing system involved a series of different activities. Approximately 20% of material related overhead involved the procurement of material components; 18% involved the scheduling of production for the PBP and LWTP wall key pads; 15% involved moving materials around the production facility and the remaining overhead was incurred for packaging and shipping of the wall pads. Quality control accounted for 45% of the variable manufacturing overhead and involved ensuring that finished wall pads conformed to the design specifications for each type. The other variable manufacturing overhead comprised of: setting machines up in preparation for production; disposing of waste; and ordering and maintaining general supplies, which are used in producing the completed wall pads. These were incurred in the ratio of 0.7: 0.25: 0.05 respectively. Machine- related overhead, was now considered a conversion cost, and involved machine soldering of the PBP and LWTP wall key pads and inserting material components into each PBP and LWTP wall key pad. The cost of soldering the wall pads 4 amounted to $634,800. Inserting material components into the wall key pads was a different process, where some of the material components were inserted by machines, and accounted for 30% of the activity cost pool. Other material components involved a more manual insertion process where a number of employees manually inserted individual components into the wall key pads. As a result of this analysis, Jane concluded that the direct labour category was no longer relevant and she also established that the only cost that would remain the same under both the traditional costing method and the ABC method is the cost of direct materials. Jane and her team also identified information specific to PBP and LWTP. Each PBP wall key pad required two machine setups whilst each LWTP wall key pad required eight setups. A total of forty-six components were used to produce the PBP and LWTP wall key pads. Of these, thirty-four specific components were used in the production of each LWTP wall key pad and fifteen of these components were manually inserted onto the LWTP wall key pad by assembly line employees. The remaining components were used in the production of each PBP wall key pad and assembly line employees manually inserted five of these components onto each PBP wall key pad. Materials were moved three times for each PBP wall key pad and nine times for each LWTP wall key pad. Both types of wall key pads passed an inspection process which involved a total of ten inspections where 20% of these were for each PBP wall key pad and the remaining inspections were for each LWTP wall key pad. A total of 0.60kg of waste would arise from the production of one PBP wall key pad and one LWTP wall key pad, and approximately 15% of this came from the production of each PBP wall key pad. As part of the analysis, Jane and her team also identified a number of activity cost drivers. These are in Figure 1 below. 5 Figure 1: Identified Activity Cost Drivers COST DRIVER Number of Wall Key Pads Number of Components Number of Material Moves Number of Setups Number of Inspections Number of Insertions** Kilograms of Waste ** manual insertions **machine (automated) insertions (CMA Adapted) REQUIREMENTS: Your task is to assist Jane and the management team by providing advice on the current situation and the future direction of the company. You are expected conduct research and analysis to prepare a report for the next management meeting, which addresses the requirements below: 1. WireBuzz's management team have agreed that the company needs to become more focused in implementing activity-based Costing (ABC) and also activity-based management (ABM) and have asked your project team to research this further with respect to product costing analysis. Firstly, you will need to conduct research and discuss, in general, how ABC and ABM can be used to gain a competitive advantage. Secondly, you should identify and discuss in detail two Australian or US, publicly listed manufacturing companies (include the company code of each) which have implemented ABC and ABM analysis explaining why the approach was chosen. In addition, discuss how these companies have used this approach and also discuss what the overall outcome has been for each company. 2. Based on WireBuzz's current traditional costing system, as outlined in the case, calculate the total cost and unit cost expected for the PBP and the LWTP wall key pads.