Tankmaster Manufacturing Company
The Tankmaster Manufacturing Company, a large manufacturer of domestic oil tanks, is located in Amersham, Buckinghamshire. Since it came into existence in 1970, the company has enjoyed steady growth in both sales and profits.
Davina Tankmaster, the founder’s daughter, joined the company in 2005 after graduating with a degree in Accounting and Finance from Manchester University. One of her first tasks was to revise the costing system, as there was a need for more accurate product cost information to support the company’s strategy of offering keen prices in a highly competitive market dominated by a few large firms.
Davina had faced considerable opposition to the changes she had suggested, with several managers being willing to accept the shortcoming of the old system because they had “learned to live with it”. Davina won the day largely because of her father’s support as the latter was convinced that “learned to live with” was a euphemism for “learned to manipulate to our own advantage”.
Davina’s father has now retired so that Davina is now conscious of the need to prove herself. Accordingly, the last thing she wants at present is the upset of another major change in the costing system. However, profits are below budget and the accountant is critical of the current costing system, saying that it is hopelessly out of line with the company’s updated manufacturing methods and also with current theories on product costing. He says, “We are still absorbing overheads on labour-hours and we have an absurdly high overhead absorption rate of £150 per labour-hour. We are pricing ourselves out of the market on our old established products. Product costs would be more meaningful if we absorbed overheads on machine-hours.”
Davina decides she must investigate. Over the past five years, overhead costs had risen to £599,300 per month, a 46% increase, while direct labour-hours have risen from £168,200 to £170,000, a negligible amount. The product processes are now largely
Davina Tankmaster, the founder’s daughter, joined the company in 2005 after graduating with a degree in Accounting and Finance from Manchester University. One of her first tasks was to revise the costing system, as there was a need for more accurate product cost information to support the company’s strategy of offering keen prices in a highly competitive market dominated by a few large firms.
Davina had faced considerable opposition to the changes she had suggested, with several managers being willing to accept the shortcoming of the old system because they had “learned to live with it”. Davina won the day largely because of her father’s support as the latter was convinced that “learned to live with” was a euphemism for “learned to manipulate to our own advantage”.
Davina’s father has now retired so that Davina is now conscious of the need to prove herself. Accordingly, the last thing she wants at present is the upset of another major change in the costing system. However, profits are below budget and the accountant is critical of the current costing system, saying that it is hopelessly out of line with the company’s updated manufacturing methods and also with current theories on product costing. He says, “We are still absorbing overheads on labour-hours and we have an absurdly high overhead absorption rate of £150 per labour-hour. We are pricing ourselves out of the market on our old established products. Product costs would be more meaningful if we absorbed overheads on machine-hours.”
Davina decides she must investigate. Over the past five years, overhead costs had risen to £599,300 per month, a 46% increase, while direct labour-hours have risen from £168,200 to £170,000, a negligible amount. The product processes are now largely