JOHN DEERE COMPONENT WORKS (A)

Managerial Accounting, Assignment – 1

Section 1, Group 1
Question 1: What are the strengths and weaknesses of the existing cost system
used at JDCW?
Strengths:
 The existing cost system is strong because it is simple and easy to maintain.
 Overhead allocation was based on direct labour hours, machine hours and material
dollars.
 The use of standard costs allows JDCW to compare actual labour overhead costs with
budgeted rates in order to determine the following years’ overhead costs.
 Gave information regarding the percentage of time on or off incentive, the level of
incentive, time delays, etc.

Weakness:
 The existing cost system does not provide the best system for JDCW’s cost allocation.
 Since this system doesn’t acknowledge activities of the production process, the true
production costs are undermined.
 Its failure to compute the material usage variances brings down the accuracy of the
accounting cost structure.
 The accounting department issues reports indicate how each area operates, rather
than evaluating the performance of each area, which would prevent a constriction in
cost efficiency.

Question 2: What causes this system to fail? What are the symptoms of cost
system failure?
Reasons for failure: The exiting cost system failed because of various reasons. Some of
them are mentioned below.

 In the current costing system, JDCW calculates its standard direct labor, direct
machine hours, and total overhead, the volumes are calculated on a long-term basis.
This system has problem if the actual production system is not for long term.
 Secondly, the overhead rates for the upcoming year in JDCW are based on the
previous years’ figures, which can cause a lot in inaccuracies as the production
volumes of the company has been fluctuating in last few years.
 The current costing system of the company is mostly outdated and it needs to be
updated. In the last few years, due to change in the production process to a more
automated system, there is a significant change in the overhead costs. So, a new
system had to be implemented to adapt to this new environment of increased
overhead costs.
Symptoms: Because of the reasons mentioned above, most of the calculations done by
JDWC were incorrect. Because of these inconsistencies, most of the low-volume parts were
under-costed whereas most of the high volume parts were over-costed. As a result of this,
the bidding done by JDWC was completely inconsistent with the other market players.

Question 3: How were the limitations of the existing cost system overcome by
the ABC system?
With the advent of technology and changing production schedules at JDWC, the current
costing system is incompatible to attain accurate information regarding the prices and hence,
ABC system has to be implemented. The below mentioned points will help in overcoming the
inconsistencies in the current costing system.

 The ABC system provides the management with more accurate cost allocations,
enabling it to make bids that truly represent its production costs.
 The ABC system helps in overcoming the overhead costs issues as the current system
under-costs the low-volume parts and over-costs the high volume parts.
 In the ABC system, overhead costs are assigned to products based on the proportion
of demand that each product places on that activity.
 In ABC system, managers will be forced to plan their future demand rather than relying
solely on the previous years’ figures.