Sippican Corp
Sippican Corporation
Sippican Corporation
Questions:
1. Given some of the apparent problems with Sippican’s cost system, should executives abandon overhead assignment to products entirely and adopt a contribution margin approach in which manufacturing overhead is treated as a period expense? Why or why not?
Answer:
Consider Sippican is a manufacturer company with multiple products, using simple cost accounting system that directly allocate factory overhead to unit of product entirely through one single allocation base (i.e. 185 % of production run direct labor cost in this case) is although an inexpensive way while is sometimes distort actual contribution of the product. To our understanding from reading the article, Sippican is spending more on overhead than on either direct material or direct labor. Further, Sippican has considerable diversity in its product mix. Each product may contain different degree of spending on indirect or supporting resources, and high variety on product and consumer characteristics. As such, activity-based cost system is considered to be a more accurate costing of present resource that will enable Sippican to project its future resource demands more effectively.
2. Calculate the practical capacity and the capacity cost rates for each of Sippican’s resources: production and setup employees, machines, receiving and production control employees, shipping and packaging employees, and engineers.
Answer:
See the Q2 worksheet.
3. Use these capacity cost rates and the production data in Exhibits 3 and 4 to calculate revised costs and profits for Sippican’s three product lines. What difference does your cost assignment have on reported product costs and profitability? What causes the shifts in cost and profitability?
Answer:
Currently, Sippican assigns overhead costs at a flat rate across all three products. While our analysis of cost and profitability reveals a dramatic difference between the cost to produce each product as reported
Sippican Corporation
Questions:
1. Given some of the apparent problems with Sippican’s cost system, should executives abandon overhead assignment to products entirely and adopt a contribution margin approach in which manufacturing overhead is treated as a period expense? Why or why not?
Answer:
Consider Sippican is a manufacturer company with multiple products, using simple cost accounting system that directly allocate factory overhead to unit of product entirely through one single allocation base (i.e. 185 % of production run direct labor cost in this case) is although an inexpensive way while is sometimes distort actual contribution of the product. To our understanding from reading the article, Sippican is spending more on overhead than on either direct material or direct labor. Further, Sippican has considerable diversity in its product mix. Each product may contain different degree of spending on indirect or supporting resources, and high variety on product and consumer characteristics. As such, activity-based cost system is considered to be a more accurate costing of present resource that will enable Sippican to project its future resource demands more effectively.
2. Calculate the practical capacity and the capacity cost rates for each of Sippican’s resources: production and setup employees, machines, receiving and production control employees, shipping and packaging employees, and engineers.
Answer:
See the Q2 worksheet.
3. Use these capacity cost rates and the production data in Exhibits 3 and 4 to calculate revised costs and profits for Sippican’s three product lines. What difference does your cost assignment have on reported product costs and profitability? What causes the shifts in cost and profitability?
Answer:
Currently, Sippican assigns overhead costs at a flat rate across all three products. While our analysis of cost and profitability reveals a dramatic difference between the cost to produce each product as reported