A Case Analysis on Huron Automotive Company

1. Using the data in the exhibits, determine the cost of a 100-unit batch of
model CS-29, a month’s spare parts, and a month’s work done for other
divisions under the present method, Bond’s first proposal, and Bond’s
revised proposal.

PRESENT METHOD:

CS-29 Injectors (per batch of 100)

  Total Hours Labor Cost per Hour Total Cost
(Present Method)
Casting/stamping 21 $ 55.96 1175.16
Grinding 12 $ 55.96 671.52
Machining 58 $ 55.96 3245.68
Custom Work 0 $ 55.96 0.00
Assembly 35 $ 55.96 1958.60
TOTAL 126 hrs.   $ 7,050.96

Spare Parts for Inventory (per month)

  Total Hours Labor Cost per Hour Total Cost
(Present Method)
Casting/stamping 304 $ 55.96 17011.84
Grinding 270 $ 55.96 15109.20
Machining 1115 $ 55.96 62395.40
Custom Work 0 $ 55.96 0.00
Assembly 0 $ 55.96 0.00
Total 1689 hrs   $ 94,516.44

Work for other Divisions (per month)

  Total Hours Labor Cost per Hour Total Cost
(Present Method)
Casting/stamping 674 $ 55.96 37717.04
 Grinding 540 $ 55.96 30218.40
Machining 2158 $ 55.96 120761.68
Custom Work 0 $ 55.96 0.00
Assembly 0 $ 55.96 0.00
Total 3372 hrs   $ 188,697.12

BOND’S 1ST PROPOSAL:

  HURON's Present Method BOND'S 1st Proposal

Department Total Cost per hour (from Exhibit 1) Total Cost per hour (from Exhibit 2)
Casting/ $55.96 ----------------------------------------> $52.97
stamping
Grinding $55.96 ----------------------------------------> $48.14
Machining $55.96 ----------------------------------------> $87.52
Custom Work $55.96 ----------------------------------------> $62.48
Assembly $55.96 ----------------------------------------> $40.19

CS-29 Injectors (per batch of 100)

  Total Hours Labor Cost per Hour Total Cost
(1st Proposal)
Casting/stamping 21 $ 52.97 1112.37
Grinding 12 $ 48.14 577.68
Machining 58 $ 87.52 5076.16
Custom Work 0 $ 62.48 0.00
Assembly 35 $ 40.19 1406.65
Total 126 hrs   $ 8,172.86

Spare Parts for Inventory (per month)

  Total Hours Labor Cost per Hour Total Cost
(1st Proposal)
Casting/stamping 304 $ 52.97 16102.88
Grinding 270 $ 48.14 12997.80
Machining 1115 $ 87.52 97584.80
Custom Work 0 $ 62.48 0.00
Assembly 0 $ 40.19 0.00
Total 1689 hrs   $ 126,685.48

Work for other Divisions (per month)

  Total Hours Labor Cost per Hour Total Cost
(1st Proposal)
 Casting/stamping 674 $ 52.97 35701.78
Grinding 540 $ 48.14 25995.60
Machining 2158 $ 87.52 188868.16
Custom Work 0 $ 62.48 0.00
Assembly 0 $ 40.19 0.00
Total 3372 hrs   $ 250,565.54

BOND’S REVISED PROPOSAL:

  1st Proposal Revised Proposal    

Labor Rate Overhead per Hour Overhead per Total Cost Revised Total
Department per Hour (ex. 2) per Hour
Hour (ex. 4) Cost per Hour
Casting/stamping $21.60 $31.37 $31.52 $52.97 $53.12
Grinding $18.00 $30.14 $28.75 $48.14 $46.75
Machining $25.00 $62.52 $61.50 $87.52 $86.50
Custom Work $22.00 $40.48 $41.06 $62.48 $63.06
Assembly $19.00 $21.19 $20.14 $40.19 $39.14

CS-29 Injectors (per batch of 100)

  Total Hours Labor Cost per Hour Total Cost
(Revised Proposal)
Casting/stamping 21 $53.12 1115.52
Grinding 12 $46.75 561.00
Machining 58 $86.50 5017.00
Custom Work 0 $63.06 0.00
Assembly 35 $39.14 1369.90
Total 126 hrs   $ 8,063.42

Spare Parts for Inventory (per month)

  Total Hours Labor Cost per Hour Total Cost
(Revised Proposal)
Casting/stamping 304 $53.12 16148.48
Grinding 270 $46.75 12622.50
Machining 1115 $86.50 96447.50
Custom Work 0 $63.06 0.00
Assembly 0 $39.14 0.00
Total 1689 hrs   $ 125,218.48

Work for other Divisions (per month)

   Total Hours Labor Cost per Hour Total Cost
(Revised Proposal)
Casting/stamping 674 $53.12 35802.88
Grinding 540 $46.75 25245.00
Machining 2158 $86.50 186667.00
Custom Work 0 $63.06 0.00
Assembly 0 $39.14 0.00
Total 3372 hrs   $ 247,714.88

2. Are the cost differences among the methods significant? What causes
these differences?

Total Cost per

department Present Method 1st Proposal Revised Proposal

Casting/stamping $ 55,904.04 $ 52,917.03 $ 53,066.88

Grinding $ 45,999.12 $ 39,571.08 $ 38,428.50
Machining $ 186,402.76 $ 291,529.12 $ 288,131.50
Assembly $ 1,958.60 $ 1,406.65 $ 1,369.90
TOTAL COST for July $ 290,264.52 $ 385,423.88 $ 380,996.78

Cost differences per Present vs 1st Present vs 1st Proposal vs

department Proposal Revised Proposal Revised Proposal
Casting/stamping -5.34% -5.08% 0.28%
Grinding -13.97% -16.46% -2.89%
Machining 56.40% 54.57% -1.17%
Assembly -28.18% -30.06% -2.61%
TOTAL COST 32.78% 31.26% -1.15%
DIFFERENCE

 The Casting/Stamping Department would have a 5.34% decrease in costs if the

company would switch over from the present method to Bond’s first proposal and
a 5.08% decrease in costs if were to switch over from the present method to
Bond’s revised proposal
 The Grinding Department would have a 13.97% decrease in costs if the company
would switch over from the present method to Bond’s first proposal and a 16.46%
 decrease in costs if were to switch over from the present method to Bond’s
revised proposal
 The Machining Department would have a 56.40% increase in costs if the
company would switch over from the present method to Bond’s first proposal and
a 54.57% increase in costs if were to switch over from the present method to
Bond’s revised proposal
 The Assembly Department would have a 28.18% decrease in costs if the
company would switch over from the present method to Bond’s first proposal and
a 30.06% decrease in costs if were to switch over from the present method to
Bond’s revised proposal
 The total cost difference for the month July would be a 32.78% increase in total
costs if the company would switch over from the present method to Bond’s first
proposal and a 31.26% increase in total costs if were to switch over from the
present method to Bond’s revised proposal.
 In Bond’s revised proposal, he would’ve decreased total costs by 1.15% in
comparison to his first proposal.

CONCLUSION:

Cost differences per department

80.00%

60.00%

40.00%

20.00%

0.00%
Casting/stamp- Grinding Machining Assembly TOTAL
ing
-20.00%

-40.00%

Cost difference (Present vs 1st Proposal) Cost difference (Present vs Revised Proposal)

Based on the two tables above, both of Bond’s proposal would have increased
the total costs for July. Hence, the negative feedback from the different department
heads of the company. The main reason for the increase in both of Bond’s proposal is
the cost difference in the Machining Department. Even though Bond managed to reduce
costs in the Casting/Stamping Department, the Grinding Department and the Assembly
Department, the rather large increase in the total costs of the Machining Department
managed to offset the decrease in the total cost of the other departments and still
increase to overall cost.

3. Suppose that Huron purchased a new machine costing $400,000 for the
custom work department. Its expected useful life is five years. This
machine would reduce machining time and result in higher quality custom
carburetors. As a result, the department’s direct labor-hours would be
reduced by 30 percent, and this extra labor would be transferred to
departments outside the carburetor division. About 10 percent of the
custom work department’s overhead is variable with respect to direct
labor-hours. Using July’s data:

a. Calculate the plantwide hourly rate (present method) if the new machine
were acquired. Then calculate indicated costs for the custom work
department in July, using both this new plantwide rate and the former
$55.96 rate.

Depreciation per month = Machine cost × (useful life/12 months)

= $400,000 × (5/12)
= $ 6,666.67
Reduced Labor Cost = Present Labor Cost – (Present Labor Cost × 30%)
= $ 81,664 – ($8,1664×30%)
= $ 57,164.80
Reduced Labor Hours = Present Labor Hours – (Present Labor Hours × 30%)
= 3,712 hours – (3,712×30%)
= 2598.40 hours
Variable Overhead Cost = 10% × Depreciation × 30% × Custom Overhead/ Hour
= 10% × $ 6,666.67 × 30% × 40.48
= $ 4,507.85

  Dollars Hours
Labor:    
Casting/stamping $ 54,604.00 2,528
Grinding $ 38,520.00 2,140
Machining $ 191,876.00 7,675
 Custom work $ 57,164.80 2,598
Assembly $ 291,784.00 15,357
Total Labor/Cost $ 633,948.80 30,298
     
Overhead $ 1,099,323.00  
Add: Depreciation $ 6,666.67  
Less: Var Cost $ 4,507.85  
New Overhead $ 1,101,481.81  
Total Labor and Overhead $ 1,735,430.61 30,298
New Plant Hourly Rate $ 57.28

  Present Method After new machine

Hourly Rate $ 55.96 $ 57.28
Labor Hours 3,712.00 2,598.40
Cost $ 207,723.52 $ 148,836.35
Cost difference -28.35%  

b. Calculate the hourly rate for the custom work department only (first
proposed method), assuming the machine was acquired, and the first
proposed costing procedure was adopted. Then calculate indicated costs
for the custom work department in July, using both this new rate and the
former $55.96 rate.

Custom Work Overhead/ Hour $ 40.48

Labor Hours 3712.00
Total Overhead $ 150,261.76
Additional Overhead $ 2,158.81
New Overhead Cost $ 152,420.57

Reduced Labor hours 2598.40

Revised Overhead/Hour $ 58.66
Labor Rate/Hour $ 22.00
Total Cost/Hour $ 80.66
New Cost/Hour
Present Method
Rate
Hourly Rate $ 55.96 $ 80.66
Labor Hours 3712.00 2598.40
Cost $ 207,723.52 $ 209,585.37
 Cost difference 0.90%

c. Under the present costing procedures, what is the impact on the indicated
costs of custom products if the new machine is acquired? What is this
impact if the first proposed costing procedure is used? What inference do
you then draw concerning the usefulness of the present and proposed
methods?
 If the machine is acquired, the overall plantwide hourly rate under
the present method will increase by $1.32 per hour. The custom
work department will still have a reduction in labor costs by 28.35%.
By that notion, the custom work department will think that the new
machine will be cost-efficient and overall a good investment in
equipment. On the contrary, since the acquirement of the machine
will increase the plantwide hourly rate, the total costs for the other
departments will also increase by $1.32 per hour.
 Bond’s 1st proposal shows that the additional overhead in acquiring
the machine (depreciation and other variable costs) will increase
the overall hourly rate for the custom work department. Even when
the labor hours are reduced when the machine is acquired, the total
costs are increased when the proposed method is used.
 Bond’s 1st proposal shows the department that acquired the
machine will be the department that will be allocated the additional
costs. Unlike the present method, in which the custom work
department, the department that acquired the machine, will have
reduced costs while the other departments have an increase in
costs due to the increase of the plantwide hourly rate.

4. Assume that producing a batch of 100 model CS-29 injectors requires

126 hours, distributed by department as shown in Exhibit 3, and $4,200
worth of materials. Huron sells these carburetors $113 each. Should
 the CS-29 price be increased? Should the CS-29 be dropped from the
product line? (Answer using both the present and the first proposed
costing methods.)

Gross Profit = Selling Price × Number of units sold

Gross Profit = $ 113 × 100 model CS-29 injectors
Gross Profit = $ 11,300

PRESENT METHOD
Labor cost per Total Hours Labor Cost Total Cost per
department per Hour department
Casting/stamping 21 $ 55.96 $ 1,175.16
Grinding 12 $ 55.96 $ 671.52
Machining 58 $ 55.96 $ 3,245.68
Assembly 35 $ 55.96 $ 1,958.60
Total Labor Cost     $ 7,050.96
Total Materials     $ 4,200.00
TOTAL COST $ 11,250.96
NET PROFIT(LOSS) $ 49.04

BOND'S 1st PROPOSAL

Labor cost per Total Hours Labor Cost Total Cost per
department per Hour department
Casting/stamping 21 $ 52.97 $ 1,112.37
Grinding 12 $ 48.14 $ 577.68
Machining 58 $ 87.52 $ 5,076.16
Assembly 35 $ 40.19 $ 1,406.65
Total Labor Cost     $ 8,172.86
Total Materials     $ 4,200.00
TOTAL COST $ 12,372.86
NET PROFIT(LOSS) $ (1,072.86)

5. What benefits, if any, do you see to Huron if either proposed costing

method is adopted? Consider this question from the standpoint of (a)
product pricing, (b) cost control, (c) inventory valuation, (d) charges to
 outside departments, (e) judging departmental performance, and (f)
diagnostic uses of cost data. What do you conclude Huron should do
regarding its costing procedures?

Both of Bond’s proposals will increase the overall costs of Huron’s products. If
Huron will implement either one of the proposals, the price of their products will also
increase so that there can be enough revenue to make a profit despite the additional
costs. In terms of cost control, both of Bond’s proposed methods will let you see which
department has a significant amount of the total cost. For example, both of Bond’s
proposals will reduce the cost of each department except for the Machining Department,
which has a significant increase in cost difference. Managers can conclude that the
Machining Department’s costs are the reason for the increase in costs. They will figure
out how to reduce these the department’s cost to increase profit. Due to the calculations
of both of Bond’s proposals, there will be an increase in the costs of good sold. The
increase will result in decrease in the value of the ending inventory. The biggest flaw of
Huron’s present cost procedure is the single departmental hourly rate because it
assumes the hourly costs of each department is the same therefore each department
should be charged the same. With both of Bond’s proposals, the company can allocate
costs like overhead directly to each department. Therefore, the company’s management
can see which department shares a significant amount in the overall costs and
determine different strategies to reduce costs on that specific department. Bond’s
proposed methods is more accurate at determining the true costs of Huron’s products.
Therefore, Huron Automotive Company should change its costing procedures to Bond’s
1st proposal. This means that Huron’s products will have to increase in price due to the
increase in cost. The company’s presence in the market allow them to increase the
price of their product because there will always be demand for the vehicle parts they are
selling.