Please note that Exhibit II of my chosen case study, Bridgeton Industries, has a few mistakes in the sub totals and therefore also in the total factory profit. I have corrected these in Attachment I and will therefore proceed to assess this case using my attachment and not Exhibit II.
The aim of this writing is to evaluate whether or not manifolds should be outsourced and to identify the reasons for sustained unprofitably at the Bridgeton Industries automotive component and fabrication plant despite improvements in the effectiveness and efficiency of production processes.
To resolve this problem I will first look at current and future profitability of the individual product lines and then examine the method of overhead cost allocation and the way in which costs are captured. I will then create an estimated model year 1990/1991 in order to evaluate the effect that the outsourcing of manifold production will have on the remaining plant operations and therefore also upon overall plant profitability. To close I will make suggestions as to what could / should be changed in order to improve transparency for future decision-making.
Table of Contents
Introduction
Product line profitability
Overhead Cost Allocation
Manifold Outsourcing
Recommendations for System Change
Cost Centres & Drivers
Standard Cost / Flexible Budgeting
ABC / Balanced Scorecard
Conclusion
Research Objectives and Key Themes
The primary objective of this assignment is to evaluate the strategic decision of outsourcing manifold production at Bridgeton Industries and to analyze the underlying causes of sustained unprofitability despite operational improvements. The research investigates how current cost allocation methods distort decision-making and negatively impact overall plant performance.
- Analysis of product line profitability and the impact of overhead allocation.
- Evaluation of direct labour as an outdated cost driver in an automated environment.
- Assessment of the "death spiral" phenomenon caused by inaccurate cost accounting.
- Recommendations for implementing multiple cost centres and flexible budgeting.
- Strategic review of outsourcing decisions based on transparent performance measurement.
Excerpt from the Book
Overhead Cost Allocation
It appears that overhead cost allocation is a major source of the company’s problems.
The main item evident here is that the allocation rates change over time. The first change is in MY 1987 when it goes down. This has been caused by direct labour increasing by 2,5 % whereas overheads increased by only 1,8% in total. It is not a sign of increased efficiency, it is just a distortion resulting from the cost driver chosen and the mathematical consequences.
MY 1988 increases so sharply, as a result of the reduction in direct labour of -46.3% being higher than the reduction in overhead and indirect expense achieved through the outsourcing of the product lines. This means that each of the remaining product lines has to accept a larger amount of overhead, which further explains the decline of Net result as a % sales previously shown in Table 2. Therefore the outsourcing has increased overall company profitability when measured as a % of sales - as can also be seen in below Table 4 through improving the companies mix, but it has reduced the overall bottom line through both removing products that contributed to the bottom line and by decreasing individual product line profitability by giving the remaining products a larger proportion of the overhead burden to carry.
Therefore it appears that decisions have been made based upon the distorted messages being given by the current method of overhead allocation.
Summary of Chapters
Introduction: Outlines the scope of the study and identifies errors in existing case study exhibits, while setting the goal to analyze manifold outsourcing and overhead cost impacts.
Product line profitability: Examines historical gross margins and net results per product, highlighting how the burden of overhead costs obscures true product line performance.
Overhead Cost Allocation: Discusses how direct labour-based cost allocation creates distortions and leads to irrational outsourcing decisions as overhead burdens shift to remaining products.
Manifold Outsourcing: Uses estimates to demonstrate that outsourcing manifolds would likely lead to a further decrease in bottom-line profitability and potentially trigger a "death spiral."
Recommendations for System Change: Proposes the introduction of multiple cost centres, flexible budgeting, and Activity Based Costing to replace current, ineffective measurement systems.
Cost Centres & Drivers: Details the necessity of establishing production and support cost centres to better attribute costs based on actual resource usage rather than just direct labour.
Standard Cost / Flexible Budgeting: Explains how splitting costs into fixed and variable elements improves "what-if" planning and prevents incorrect management decisions.
ABC / Balanced Scorecard: Recommends a comprehensive performance evaluation system that integrates quality, technical, and service factors alongside cost data.
Conclusion: Summarizes that outsourcing decisions require a total re-evaluation using transparent, modern accounting practices rather than current distorted methods.
Keywords
Management Accounting, Overhead Allocation, Outsourcing, Cost Drivers, Bridgeton Industries, Product Line Profitability, Direct Labour, Standard Costing, Flexible Budgeting, Activity Based Costing, Balanced Scorecard, Cost Centres, Decision Making, Operational Efficiency, Profitability Analysis
Frequently Asked Questions
What is the primary focus of this assignment?
This work focuses on evaluating the financial and operational impact of outsourcing decisions at Bridgeton Industries, specifically questioning the validity of current cost accounting methods.
What are the central themes discussed?
The central themes include the limitations of direct labour-based overhead allocation, the risks of the "death spiral" in pricing, and the need for structural changes in performance measurement.
What is the research goal?
The goal is to determine if manifold outsourcing is profitable and to provide recommendations for improving decision-making transparency through better cost management.
Which scientific method is applied?
The assignment employs a case-based financial analysis, utilizing historical data (model years 1986–1990) and estimated projections to model the effects of strategic outsourcing.
What topics are covered in the main body?
The main body covers product line performance, the critique of existing overhead allocation models, the development of estimated future financial models, and strategic recommendations for management systems.
Which keywords characterize this study?
Key terms include Management Accounting, Overhead Allocation, Cost Drivers, Activity Based Costing, and Outsourcing, reflecting the financial and managerial focus of the analysis.
How does the reliance on direct labour affect the company?
Because the company has become highly automated, direct labour is an inaccurate cost driver; relying on it causes overhead costs to be incorrectly distributed, leading to the distortion of product profitability.
Why does the author recommend a Balanced Scorecard?
The author argues that cost data alone is insufficient; a Balanced Scorecard allows for the inclusion of quality, technical performance, and customer service, providing a holistic view of product line success.
- Quote paper
- Andrew Brabner (Author), 2002, Bridgeton Industries, Munich, GRIN Verlag, https://www.grin.com/document/7646
