Morelli Motors Corporation
1.0 INTRODUCTION
1.1 OVERVIEW OF THE COMPANY
Morelli Electric Motor Corporation manufactures electric motors for commercial use. The company produces three models assigned as standard, deluxe and heavy duty. The company uses a job costing system with manufacturing overhead applied on the basis of direct labour hours. The system has been in place with minimum change for 25 years.
1.2 THE CURRENT RISING ISSUE
For the past 10 years, the company’s pricing has been to set each product’s budgeted price at 110 per cent of its full product cost. Recently, however the standard-model motor has come under increasing price pressure from offshore competitors. As a result the price on the standard model has been lowered to $110. The company CEO recently had a discussion with the financial controller on why they are unable to compete with their other competitors. He even added that other competitors in the market are also producing the same standard models just like them and their selling price is only few dollars more than their production cost. He wonders that is that his company producing such an insufficient product.
However his financial controller explains that the actual concern should be more on the outmoded product costing system. He added that he raised a voice regarding the same issue on last year’s board. However, the management decided to keep the current costing system at that time. He highlighted that their product costing system is distorting their product cost. The product costs and annual sales data can be refer as follows:
Then to further show in detail on their actual position, he demonstrated the activity-based costing system to have a comparison with their current system. He compiled the basic data needed to implement an activity-based costing system. These data are displayed in the following table. The percentages are the proportion of each activity driver consumed by each product line.
1.3 THE COMPARISON BETWEEN TRADITIONAL COSTING SYSTEM AND
1.1 OVERVIEW OF THE COMPANY
Morelli Electric Motor Corporation manufactures electric motors for commercial use. The company produces three models assigned as standard, deluxe and heavy duty. The company uses a job costing system with manufacturing overhead applied on the basis of direct labour hours. The system has been in place with minimum change for 25 years.
1.2 THE CURRENT RISING ISSUE
For the past 10 years, the company’s pricing has been to set each product’s budgeted price at 110 per cent of its full product cost. Recently, however the standard-model motor has come under increasing price pressure from offshore competitors. As a result the price on the standard model has been lowered to $110. The company CEO recently had a discussion with the financial controller on why they are unable to compete with their other competitors. He even added that other competitors in the market are also producing the same standard models just like them and their selling price is only few dollars more than their production cost. He wonders that is that his company producing such an insufficient product.
However his financial controller explains that the actual concern should be more on the outmoded product costing system. He added that he raised a voice regarding the same issue on last year’s board. However, the management decided to keep the current costing system at that time. He highlighted that their product costing system is distorting their product cost. The product costs and annual sales data can be refer as follows:
Then to further show in detail on their actual position, he demonstrated the activity-based costing system to have a comparison with their current system. He compiled the basic data needed to implement an activity-based costing system. These data are displayed in the following table. The percentages are the proportion of each activity driver consumed by each product line.
1.3 THE COMPARISON BETWEEN TRADITIONAL COSTING SYSTEM AND