Managerial accounting, HBR case study, accouting

1. INSTEEL WIRE
PRODUCTS:
ABM AT ANDREWS

2. TEAM 1
AJAT SHATRU KAUSHAL
RAGINI SHARMA
SRIKANTH AYITHY
DIVYA SRI CHOKKAKULA
SUJIT INDAVARAPU
RAGHUVEER KODALI
GOPI KRISHNA
MYRA SCHOOL OF BUSINESS.

3. INTRODUCTION
▪ About the company : Insteel wire products is a division of Insteel industries and manufactures and
markets a broad range of wire products .
▪ The company’s primary markets are
a) Construction,
b) Home furnishings,
c) Appliance,
d) Agricultural industries.
▪ The company is operating eight manufacturing facilities and has an annual sales revenue of
about $300 million.
▪ Andrews CS Plant : has 4 product lines :
1) Steel wire of different gauges,
2) Galvanized wires of different gauges,
3) Wire mesh,
4) Nails.
▪ Nails production is from two mills :
▪ Mill A – Commodity nails and sinkers
▪ Mill B – Pallet nails, heading and threading specifications.
▪ Spread across these four product lines are 477 individual products.

4. ABC INITIATIVE AT INSTEEL
In 1996, Management decided to start ABC analysis at Andrews Plant on account
of Increase in pricing pressures and capacity constraints.
Before the ABC initiative:
1) The price of basic Raw Material, Steel Rod, was used to estimate material
cost s of all of Insteel Products by multiplying the weight of product by the
price of the steel rod.
1) No specific product or customer based costing information was there.
2) Sales strategy : Volume-oriented.

5. ABC AT ANDREWS PLANT : 1995 -96
Major findings of the ABC Analysis:
1) 45% of customers and 45% of Products were unprofitable.
2) Galvanized wires (considered profitable) and mesh products (break-even) were losing
money.
3) The nail business previously thought to be moderately profitable, was actually the
company’s most profitable business.
4) Within nails – Pallet nails turned out to be the most profitable.
PRODUCT
GROUP
SALES
MATERIAL
COSTS
PRODUCTION
COSTS
CUSTOMER
COSTS
BUSINESS/
FACULTY
SUSTAINING
COSTS
TOTAL
COSTS
PROFIT
Bright Wire 10.462 6.763 1.235 1.499 0.416 9.913 0.549
Galv wire 12.866 8.816 2.057 1.567 0.545 12.985 -0.119
Nails 30.613 19.902 6.585 1.327 1.219 29.033 1.58
Mesh 5.07 4.277 0.708 0.504 0.24 5.729 -0.659

6. ACTIONS ON ABC ANALYSIS
Based on the intensive investigation, to make unprofitable products
profitable various Process Improvement areas were identified and
actions taken in
a) Quality.
b) Preventive Maintenance.
c) Freight Handling.
d) Change in Product and Customer Mix.

7. ACTIONS ON ABC ANALYSIS
▪ Pallet nails were the most profitable product
▪ Production Plants for Pallet nails was running at full capacity,
▪ Considering opportunity, Insteel decided to increase the number of
plants for pallet nails from 2 to 4 in two phases with immediate
expansion with 3rd line and plan for 4th afterwards if product continued
to perform well.
▪ Insteel Spend $900,000 on additional machine with zero salvage value
at end of 10 years.
▪ The third plant didn’t go into production until June 1997 due to delay in
machine delivery.

8. Follow-up ABC Analysis in 1997
Results
▪ Sales increased by $5.9 million, profits increased by $0.5 million.
▪ Quality costs reduced by $1.8 Million
▪ Freight costs reduced by $555,000
▪ Raw material prices increased during the year
▪ Pallet nails (previously, the most profitable product of insteel) had become
one of the most unprofitable product.

9. LOSSES
Was third line required?
why….???
1995-96 1996-97
Sales ($M) 1.95 2.1
Sales in tones 2600 2817
Material costs ($M) 0.9 -1.1
Conversion cost ($M) 0.859 1.271
Net profits ($M) 0.191 -0.271

10. EXHIBIT 4 : ( Galvanized pallet nail-related overhead cost information, 1995-96 and 1996-97)
Cost pool Cost hierarchy Cost driver 1995-96
Driver volume
1995-96
Spending
1995-96
Driver volume
1995-96
Spending
Cleaning house Unit Tons cleaned 100000 $210000 110000 222000
Depreciation wire drawing machine Unit Tons drawn 100000 $420000 110000 420000
Depreciation Nail Galvanizer Unit Tons galvanized 40000 $623000 45000 623000
Depreciation- heading and threading machine Unit Tons headed/
threaded
2600 $50000 2817 140000
Material handling Batch Number of moves 4000 $305000 4500 350000
Dies retooling Batch Tool shop hours 3000 $352000 3300 382000
Wire drawing changeovers Batch No of changeovers 700 $267000 700 272000
Quality inspection Batch No of inspections 1000 $407000 1000 420000
Pricing and advertising Product Traced to products $300000 287000
Order processing invoicing Customer Number of orders 3000 $163000 3000 143000
Invoicing Customer Invoices ordered 3000 $87000 3000 92000
Freight Customer Traced to customers $1110000 1290000
Information systems Faculty Tons produced 100000 $1287000 110000 1330000
EVN on wire drawing equipment Unit Tons produced 100000 $1800000 110000 1724000
EVN on nail galvanizer Unit Tons galvanized 40000 $1800000 45000 1688000
EVN on Heading/ threading machine Unit Tons headed/
threaded
2600 $90000 2817 227000
Inventory EVN Unit Tons produced 100000 $692000 110000 703000

11. Exhibit 6 other costs assigned to galvanized pallet nails; 1995-96 and 1996-97
Cost pool Spending in 1995-96 Spending in 1996-97
Pricing and advertising $10000 $9000
Labor $400000 $600000
Freight $30000 $31000
Inventory EVA @ 18 % $18000 $18000
Equipment EVA @ 18 % $253800 $376800

12. Driver Pallet Nails Corrected
Cost Cost Costs
Conversion Cost 12,70,616 8,43,618
Materials Cost 11,00,000 11,00,000
Total Cost 23,70,616 19,43,618
Sales 21,00,000 21,00,000
Profit -2,70,616 1,56,382
Cost of Excess/Inaccessible Capacity 4,27,000
Profit -2,70,616
Reconciliation of cost of inaccessible
capacity
Depreciation 90,000
EVA on equipment 1,37,000
Labor 2,00,000
Total 4,27,000
Corrected Calculations for 1997

13. 1995-96 1996-97
Sales ($M) 1.95 2.1
Sales in tones 2600 2817
Material costs
($M)
-0.9 -1.1
Conversion cost
($M)
-0.859 -1.2
Net profits ($M) 0.191 -0.2
1997-98
(Proposed)
3.1
4200
-1.6*
-1.3*
0.2
Budget for 1997-98
* Considering increase in raw material quantity required for third line