Zauner Ornaments Case Analysis

INTRODUCTION Businesses – from manufacturing, merchandising and service industries alike – take careful consideration in the analysis of their costing systems in order to be able to set up competitive prices in the market. Misallocation of costs may lead to incorrect price estimates, continuous production of unprofitable products, and ineffective processing schedules. In this case study, we will discuss the costing methods which Zauner Ornaments have used or is currently using and, in conclusion, be able to distinguish the advantages and disadvantages of each costing method. CASE CONTEXT The case seeks to assist Zauner’s comptroller, Yu Chia-yi, in determining the best costing method for their overhead costs. In addition we also aim to understand the following concepts: 1. Differences between traditional costing systems and activity-based costing and; 2. Proper allocation of overhead costs with identification of activities and its associated costs. Zauner Ornaments is launching three different products for their expansion. Yu doubts if the selling prices set by the Sales Department are enough to generate profit for each product line. She analyzes the unit costs for their products to see if the selling prices can cover product costs. Currently, Zauner allocates its factory overhead on the basis of production volume, but there is a significant loss per unit for the small colored glass ornaments. Their Operations Director, David Metz, suggested, in contrast, that overhead allocation be based on prime costs (sum of direct material and direct labor costs) which will result to lower product costs and, therefore, profits per product line. Yu is convinced that both overhead allocations are not accurate enough to trace the costs associated to each product so she tries to divide the support costs using the activity-based costing system. PROBLEM STATEMENT We have identified the issues for the case as follows: 1. Which costing system should Zauner use to allocate the factory