Destin Brass Product Co Essay

Established in 1984, Destin brass section Products Co. had grown to become a significant player in the assiduity of manufacturing water refining equipment. By identifying a market for water purification valves, Destin shamelessness quickly built brand awareness and a node base. Destin Brass developed propriety manufacturing techniques and had a deep understanding of working with brass. This competitive advantage led Destin Brass to add pumps and flow controllers to its crop range. Valves, Pumps and Flow Controllers represented 24%, 55% and 21% of company revenues respectively with each having a planned gross margin of 35%. In recent times, manufacturers of pumps had entered into a price war forcing prices down and consequently Destin Brass saw its gross margin on pump sales doze off to 22%. At the same time, Destin Brass had found that the price snatch of demand for Flow Controllers was relatively inelastic, when it change magnitude prices by 12.5% with no put up on deman d.Confused by competitor moves in the price acrimonious of pumps, the managers at Destin Brass considered if competitors simply didnt know what they manufacturing woos were, merely it was to a greater extent likely that problems may lie within Destin Brasss constitute accounting system. Destin Brass currently had a traditional cost accounting system in place. The system took into account direct and verificatory be based on production and sales activity. Each produced building block was charged for material cost based on component costs and repel costs based on production run fag out times. Overheads were then allocated in a two stage process and yielded sample unit cost of $37.6, $63.1 and $56.5 for valves, pumps and flow controllers respectively.An alternative to the traditional approach would be to forego overhead cost allocation altogether. Material and set-up labour cost overheads would be allocated to each product line and machine hours would be changed for labour dol lars as the bag for allocating the remaining factory overhead. This revised approach trim back pump and flow controller unit costs to $58.9 and $47.9 but increased valve unit costs to $49. A final approach involved more accurately distributing engineering costs and the idea that activity, rather than production volume, set costs.This activity based costing ( rudiment) system would be allocated on the basis of transactions. ABC yielded a standard unit cost of $47.2, $51.6 and $74.2 for valves, pumps and flow controllers respectively. The ABC system suggested that Destin Brass could reduce pump prices dramatically whilst still maintaining wakeless margins and at the same time increase flow controller prices to maximise profits. The case illustrates that misused cost accounting systems can have real strategic implications for a business.