The document discusses a vehicle parts supplier that is proposing to change its costing method from a single cost center to multiple cost centers. It notes the supplier has five production departments and makes both custom and standard products. It provides exhibits showing the proposed departmental labor and overhead rates under the new multiple cost center method compared to the previous uniform plant-wide rates. The document analyzes how the new costing method would affect product pricing, cost control, inventory valuation, and the ability to judge departmental performance.

2. •Vehicle Parts Supplier
Company •Competing on Price Basis
•Focus on small volume products
•Carburetor and Fuel Injection Division
Division •Five Production Departments
•Custom/ Standard Products – Made to Order
•Uniform plant-wide labour and overhead cost
Costing •Allocation among jobs on basis of labour hours
•Monthly variations

3. •From uniform to department wise hourly rate
•Single cost centre to Multiple (5) cost centres
•Rationale: Variation of labour skill and overheads
•Indirect Costs: Eg. Heating cost distributed on basis of
cubic feet of space
Exhibit 1: Plant-wide Rates for July
Item Dollars Hours
Labour Exhibit 2: Proposed Dept Rates
Casting/Stampin Dept Labour Overhead Total
g 54,604 2,528 (Per Hour)
Grinding 38,520 2,140 Casting/Stampin
Machining 1,91,876 7,675 g 21.60 31.37 52.97
Custom Work 81,664 3,712 Grinding 18.00 30.14 48.14
Assembly 2,91,784 15,357 Machining 25.00 62.52 87.52
Total Labour 6,58,448 31,412 Custom Work 22.00 40.48 62.48
10,99,32 Assembly 19.00 21.19 40.19
Overhead 3
17,57,77
Total Labour & Overhead 1
Hourly
Rate 55.96

4. •Monthly varying rates to uniform rates
•On basis of average monthly volume
Exhibit 3: Dept Overhead Rates (Normal Volume)
Dept Normal Vol. Normal OH/DLH
(DLH) Overheads
Casting/Stamping 2,500 78,800 31.52
Grinding 2,400 69,000 28.75
Machining 8,000 4,92,000 61.50
Custom Work 3,600 1,47,820 41.06
Assembly 17,500 3,52,450 20.14
Total 34,000 11,40,070 33.53

5. •Base reference – CS29 Injectors, Spare Parts for
Inventory, Work for other divisions
•Substantial change from old to proposed methods
•Insignificant difference between the 2 new proposals
– July volume similar to Normalized volume
•Cost of these products more: use of more machining
hours
•Different set of products: drastically less cost
CS-29 (100 unit Batch) Spare Parts Other Depts
possible Hours %age Hours %age Hours %age
Casting/Stam
ping 21 17% 304 18% 674 20%
Grinding 12 10% 270 16% 540 16%
Machining 58 46% 1,115 66% 2,158 64%
Custom Work 0 0% 0 0% 0 0%
Assembly 35 28% 0 0% 0 0%

6. •Refer Excel Sheet
Analysis
•Single Cost Centre: Cost substantially decreases with
new machine introduction
•Machine purchase in one department affects all
departments
•Multiple Cost Centres – Cost almost same, though
labour hours reduced
•Depreciation of machine also taken into account
•Department specific investments affect only that
department

7. • CFI handles overflow capacity
Outside Depts. • 32% Increase in Costs!
• Already being charged more than if work done in-house
Production • Views change as pointless
• Feels paperwork will increase
Manager of CFI • Seems not to be clear with the method
Sales Manager
• Concerned about price change
• Only bothered about end profits

8.  Product pricing
◦ Better because costs are distributed based on the
operation performed on it
◦ Corrections of imperfections; custom/ standard
products
◦ Feasibility?
 Cost Control
◦ Since the cost can be traced back to the operations
for individual products, it helps in better cost control
 Inventory Valuation
◦ More representative as the new method allows better
tracing of cost

9.  Charges to outside department
◦ 32% increase in cost
◦ Depends on the accounting method used by
them
 Judging departmental performance
◦ Better since the cost analysis can be done based
on the operations performed
 Diagnostic uses of cost data
◦ Helps in better tracking and planning
◦ Look at departmental improvements

10. Thank You!