Superior Manufacturing Co. Case Solution
The data provided in Exhibit 4 was very useful for the company as it determined the costs whichwere favorable and unfavorable to the costs structure and the foundation of new standard costing system introduced to the company. Moreover, this data was used for analyzing the performance of cost structure, valuation of inventories and for preparing budgets for coming years. This data would help the companyto make more favorable decision and determine the unfavorable costs and eliminate them in order to generate more profitability.
Question 4:Why is it important that Superior has an effective cost system? What is your overall appraisal of the companyâ€™s cost system and its use in reports to management? List the strengths and weaknesses of this system and its related reports for the purposes management uses the systemâ€™s output. What recommendations, if any, would you make to Waters regarding the companyâ€™s cost accounting system and its related reports?
The company is facing loss and strong competition for many years. Moreover, some strong decisions havealso been made in few years. Therefore, it is very important for the further establishment of the company to make effective decision which is favorable itself and for its future. As it has been operating in a competitive market and facing loss from last few years, therefore, development of effective cost system is very important for the company to generate profits and facilitate company with growth and prosperity.
To appraise companyâ€™s cost system, it is very important to analyze which costs are necessary for the products. Moreover, the overall growth of the company as well as per product growth of the company should be analyzed. Consequently, as Product 103 is costing high andgenerating less revenue it should be immediately dropped in order to save company from further loss and inefficient use of resources. The standard cost system is favorable for the company to some extent. Following are the strengths and weaknesses of the costing system:
- Providesfavorable and unfavorable costing relating to the companyâ€™s development of respective products.
- As it anticipates with the actual costing of last yearâ€™s product selling price, if all other subjects remain same, the prediction would be 99% correct.
- It is ignoring the facts and risks that existed over the years.
- Standardized finished goods were analyzed for further prediction, difference between products is ignored.
- Unfavorable variance among standardized and actual costs can differ and would set higher costs.
As the companyâ€™s cost accounting system is taking company towards profitability and making cost system better than before, therefore, it is recommended for the company to take this strategy forward to make the profitability constant and promising in future.
Question 5:If you could sell 100,000 units of any of the 3 products, which would be chosen? Why?
If I could sell 100,000 units of a product, I would go for selling Product 102 because the Product B is not generating enough revenue to cover its direct and indirect costs. Therefore, by adding 100,000 units to its sales, the product would be able to generate revenue which would be enough to cover the costs. Moreover, revenue generated from selling additional 100,000 units would also result in profitability to the company for Product 102.
If you could sell 100,000 units of any of the 3 products and you determine that labor usage is indicative of the usage of other factors of production, then which product would you sell? Why?
By determining labor usage as indicator of other costs, it has been analyzed that company would be selling Product 103, as it has the lowest labor cost in comparison to Product 101. Product 101 has the highest direct as well as indirect labor cost. On the other hand, Product 103 has higher labor cost in comparison with Product 102 and it would not generate positive results despite of selling 100,000 extra units due to its higher costs implementation and lesser unit sales.Hence selling the additional units of the 103 is more profitable for the company in terms of meeting the cost criteria and break even as compared to product 101, which cannot reach the breakeven or generate profits even after adding 10000 units more.
A customer, whose use for the products is such that he gets the same utility per dollar from each of the three, has asked for $100,000 worth of any one of the three products.Which product would you sell to this customer? Why?
If the same utility is generated by all three products, the decision would be selling Product 101 because it has been analyzed that Product 101 will be generating the highest revenue and would be selling the highest number of units among all three products. Therefore, to provide benefits to the company, Product 101 should be sold to make effective decisions for other two products. However, making $100,000 sales in other two products wonâ€™t benefit the company as they would not result positively and would remain inefficient to cover their direct and indirect costs.
To conclude this report, following points have been learnt and discussed in the above report:
- Dropping the product line which does not make profits to the company such as Product 103 should be dropped immediately and resources of respective products should be used efficiently.
- In order to compete strongly in the market, company should forgo its remaining profit of the product in order to save its reputation against the competitors.
- The usefulness of effective costing strategy of the products and immediate returns and profits facilitated to company by implementing effective and efficient structure such as standardized costing system.
- The strengths and weaknesses of the costing system and the recommendation to keep it or to leave it.
- The analysis of adding sales of 100,000 units in different product lines and its impact on its profitability………………….
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