Bridgteon Industries Cost Accounting System Essay

1173 words - 5 pages

The managerial accounting system at Bridgeton, as it is presented, seems to be lacking detail necessary for efficient analysis. The sections used are sales, direct material, direct labor and overhead by account number, each divided into individual accounts and summed to find totals. There is no separation of fixed and variable costs in any of the accounts, making it difficult to analyze exactly where operations are costing money and, therefore, how they could possibly be improved. The presentation of the information groups all sales together and the different categories of costs together and does not provide for individual product analysis. The products are analyzed (categorized into classes) based on their costs, with no consideration to revenues associated with these products, and no real understanding of the overhead applied to each product. The overhead costs are applied to accounts based on labor and materials of the company as a whole, rather than using considerations associated with the individual products.
The presentation of the material is in dollars only. Overhead is applied to products as a percent of direct labor dollar cost. Factory profit for each year is found by subtracting direct material, direct labor, and direct overhead costs from total sales. The overhead percentage is calculated at the same time budgeting and is applied as a single overhead pool throughout each model year. The consulting company used 435% of direct labor costs in 1987 for their study; the budgeted was actually 437% (OH/DL=107,954/24,682). A similar percentage applies in the following year (109890/25294=434.5%). However in the next two years, after the outsourcing of oil pans and mufflers was enacted, the allocation of overhead increased to 577% (78,157/13,537) in 1989 and 563% (79,393/14,102) in 1990. Overhead decreased by approximately $30,000 due to the outsourcing, and direct labor decreased by approximately $12,000. The changed rates are due to the fact that the overhead reported in the accounts is not based solely on variable labor, but rather has other (including fixed) components.
It is difficult to predict without more detailed accounting numbers and without interview employees exactly which of the overhead costs are fixed and which are variable, as well as which account is mixed. In reality, most of the accounts will have both fixed and variable costs. They will have initial costs to get started and ensure that they are available (i.e. fixed costs), and the more they are necessary (used), the more the costs will increase (i.e. variable costs). We can, however, make educated guesses as to which accounts are mostly variable, mostly fixed, and which have much of both (mixed). To do this, we look at two things. First is the cost structure of each account and how they change each year (Exhibit 2). However, it is difficult to estimate based on regression analysis or high-low methods because the change in direct labor is not...

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