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Activity Based Costing Draft

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Activity Based Costing Draft
ABSTRACT This case details a fictional denim processing plant providing the service of custom finishing to denim pants for original manufacturers. The case is a lesson in how interdependencies among products in the production process and the costs associated with those interdependencies can be cost analyzed for management decisions. The retooling of a finishing machine change-over production from an existing stonewash process to accomplish a proposed distressed finishing process for a new customer, is the cost interdependency studied. We explain how marginal costing and full cost activity-based costing (ABC) are used by the controller to present management product optimal (profit-maximizing) production decisions on the proposed contract.

The Denim Finishing Company provides laundering and special finishing of denim pants for the original manufacturer. Their specialty is converting unwashed denim jeans and other denim products a variety of finishes including bleached, stonewashed, rinsed, and other finishes. The factory utilizes six machines with differing technical specifications per product. Only one machine can accomplish the “stonewash finish” using pumice stones in the machine, and running at capacity, is not able to fulfill the entire current customer demand for this product. It currently is running at maximum capacity on three shifts. Denim Finishing Company’s new Marketing Manager in the case, Diane, proposed accepting a new customer contract from Guess Who Jeans for a proprietary custom finish that would yield gross revenue of $7.00 per garment for 100 shipments of 500 garments per shipment. They would require finishing on the Unit 4 machine, after a changeover process on the machine converting it from stonewash finishing to the Guess Who “distressed” finishing. This revenue per garment is much higher than current revenue per garment for the stonewashed finish. Most of the company’s costs are overhead with respect to any one customer or
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