Dyna Golf

Required
• Verify the current cost of each product using the present system of cost allocation • Apply the system proposed by Meyers:
• Break-out setup cost from MOH and assign it directly to each product directly • Allocate receiving department on the basis of direct material dollars • Allocate the balance of OH$ (of Engineering,பைடு நூலகம்machining and packing) using machine hours as the allocation base
What departments do
• Packing • Setup • Packs and ships completed units • Cleans the machine and jigs • Adjusts the machine settings for the desired product • Runs the machine to make test products • Machining • Has several machines for making club heads • Every machine must be set up in the form of jigs etc to make a type of club
• Market
• Golfers experiment with putters all the time and own several putters • Golfers seldom experiment with wedges; once settled in stick with a club
ABC Costing: Pushing OH department cost to products: Receiving -- $300,000 (separate order for each component)
Driver Wedge Putter # of C X # of runs = #orders 10 x 10 = 100
• Apply an activity based costing system • What observations can be made by a comparison of the costs obtained from the three approaches?
ABC Costing Approach will be illustrated
$105.70
$87.16
$52.85
Overhead cost data
Department Receiving Engineering Machining Packing Setup Total OH Cost $300,000 $500,000 $700,000 $200,000 $3,000 $1,703,000
% of change orders 40% x Pool cost x $500,000 = cost to allocate = $200,000 ÷ # of runs ÷ 10 = $/run = $20,000 ÷ run size ÷ 500 = cost/unit = $40.00 Or $200,000/5,000 = $40
• Products feature unique and proprietary properties and patent protected to some degree • Pricing policy
• Set prices to achieve a gross margin of 35%
What departments do
• Receiving • Issues a separate order for each component comprising a club head • Inspects each order when it arrives • Engineering • Ensures each produced unit complies with specs • Responsible for issuing change orders to accommodate variation in tolerances of purchased components • 25% of change orders triggered by driver; wedges generate 35% and putters generate 40%.
# of C x # of runs = #orders
5 x1 =5
# of C x # of runs = #orders
6 x3 = 18
x rate = pool cost ÷ volume = cost/unit
x $2,439 = $12,195 ÷ 10,000 = $1.22
x rate = pool cost ÷ volume = cost/unit
Driver Wedge Putter
% of change orders 25% x Pool cost x $500,000 = cost to allocate = $125,000 ÷ # of runs ÷1 = $/run = $125,000 ÷ run size ÷ 10,000 = cost/unit = $12.50
Tension at Dyna Golf
• Significant price competition and encroachment on the differentiation barrier via technology infused substitutes • Experiencing classic symptoms of a broken costing system • The putters are selling brilliantly and sales don’t seem to be hurting despite multiple increases to the selling price • The wedges on the other hand are not selling well and despite lowering of the price the market seems uninterested and further decrease in price would invite taking a loss • Basically the customers and rivals don’t seem to care about our putter price increases and we don’t have any more room to cut wedge prices
Dyna Golf
ABC Case by John Shank and Vijay Govindarajan Solution note by Ganesh Vaidyanathan
Case facts
• Makes three types of golf clubs:
• Driver—sold via a single distributor • Putter—sold via 6 distributors • Wedge—sold via 3 distributors
ABC Costing: Pushing OH department cost to products: Machining-- $700,000 (MH is driver)
Driver Wedge Putter MH/unit 1/2 x units x 5,000 = #MH = 2,500
MH/unit x units = #MH
1/4 x 10,000 = 2,500
MH/unit x units = #MH
1/3 x 15,000 = 5,000
x rate x $70 = pool cost = $175,000 ÷ volume ÷ 10,000 = cost/unit = $17.50 Or $70 x ¼ = 17.50
Selling prices—actuals versus target
Target price Actual price Estimated current cost of each product (using DL$ run labor)
Driver $162.61 $162.61 Wedge $134.09 $125.96 Putter $81.31 $105.70
Production and product information
Raw materials Setup Labour ($20/H) Run labour ($20/H) Machine time Production Run size #Runs Shipments #batches shipped #of change orders Drivers 5 @ $4 10H/run ½ H/driver ¼ H/driver 10,000 10,000 1 10,000 1 25% Wedge 6 @ $5 10H/run 1/3H/wedge 1/3 H/wedge 15,000 5,000 3 15,000 5 35% Putters 10 @$1 11H/run ¼ H /putter ½ H/putter 5,000 500 10 5,000 20 40%