John Deere Case Study
JOHN DEERE
COMPONENT WORKS
CASE STUDY -
1. STRENGTH AND WEAKNESS OF EXISTING
COST SYSTEM USED AT JDCW
Strengths
Very Simple allocation, based on direct labor & direct machine hours
Satisfactory at aggregate level, due to high volume of products
Period overheads & Product overheads is taken care
ACTS ( actual cycle time standard) rate was good due to more number of automated machines
Less Computing effort
Overhead rates were reassessed and re-established each year
Costing was based on normal volumes, wherein sharp swings were smoothed out by adopting “through the business cycle” volume.
Weakness
For bidding & costing of individual parts, it was ineffective
Huge variation among the standard cost of various parts, so determining the cost of parts were very much doubtful
Machine hours were not based on produced units, leading error in allocating the cost
Employee benefits were based on machine hours
Overhead budgets were based on past charges & not on actual volumes of that particular years, so it was not reliable
2. WHAT CAUSED THE SYSTEM TO FAIL?
WHAT ARE THE SYMPTOM'S OF COST SYSTEM
FAILURE?
Reasons for Failure
Allocation of cost was not proper, besides direct labour and direct material, overhead costs consisting of direct and period overhead on labour and material was added to the part cost.
Allocation of overheads were also not proper, Overhead costs were evenly distributed without analysing which area used which overhead
Cost driver identification was wrong, Costs were not assigned based on activity.
Symptom's of Failure
Loss of business
When competitive bids are lower than ours
When our own parent company chooses competition over our bids because of high price
3. HOW THE LIMITATION OF EXISTING SYSTEM
OVERCOME BY ABC SYSTEM
Firstly the use of overhead resources was explained as seven different types of activities
Then, it was questioned as to which of the seven activities caused a particular expense or took more work from a particular overhead resource
COMPONENT WORKS
CASE STUDY -
1. STRENGTH AND WEAKNESS OF EXISTING
COST SYSTEM USED AT JDCW
Strengths
Very Simple allocation, based on direct labor & direct machine hours
Satisfactory at aggregate level, due to high volume of products
Period overheads & Product overheads is taken care
ACTS ( actual cycle time standard) rate was good due to more number of automated machines
Less Computing effort
Overhead rates were reassessed and re-established each year
Costing was based on normal volumes, wherein sharp swings were smoothed out by adopting “through the business cycle” volume.
Weakness
For bidding & costing of individual parts, it was ineffective
Huge variation among the standard cost of various parts, so determining the cost of parts were very much doubtful
Machine hours were not based on produced units, leading error in allocating the cost
Employee benefits were based on machine hours
Overhead budgets were based on past charges & not on actual volumes of that particular years, so it was not reliable
2. WHAT CAUSED THE SYSTEM TO FAIL?
WHAT ARE THE SYMPTOM'S OF COST SYSTEM
FAILURE?
Reasons for Failure
Allocation of cost was not proper, besides direct labour and direct material, overhead costs consisting of direct and period overhead on labour and material was added to the part cost.
Allocation of overheads were also not proper, Overhead costs were evenly distributed without analysing which area used which overhead
Cost driver identification was wrong, Costs were not assigned based on activity.
Symptom's of Failure
Loss of business
When competitive bids are lower than ours
When our own parent company chooses competition over our bids because of high price
3. HOW THE LIMITATION OF EXISTING SYSTEM
OVERCOME BY ABC SYSTEM
Firstly the use of overhead resources was explained as seven different types of activities
Then, it was questioned as to which of the seven activities caused a particular expense or took more work from a particular overhead resource