10.11 Discussion & Practice

  1. In the discussion on cost breakdown analysis, you noted that the supplier's overhead allocation was 150% of labor. At the time, you thought that was high in comparison to industry standard! Imagine you will be meeting with this supplier to discuss the supplier's proposed price increase. Develop a script (i.e., a game plan) for your conversation. How could you use this conversation to help reduce costs?

  2. You've compiled the market prices and historical prices for three of your commodity teams. Which team has performed the best?

    PPI (Market) Actual (Historical)
    Oct-14 Oct-15 Oct-14 Oct-15
    Steel 173.7 191.7 2.25 3.00
    Paper 176.3 186.5 27.00 28.80
    Fuel 166.8 187.6 132.75 145.00

  3. You are purchasing televisions from an overseas supplier in Korea. The supplier ships 500 televisions in each container. Based on the data provided, what is the total unit cost for each television?

    Cost Category Cost
    Purchase price per television $87.50
    Ocean Freight costs per container $5,000
    Customs fees based on unit price 8%
    Port handling costs per container $2,750
    Insurance costs per container $500
    Warehouse charges per television $1.00
    Quality control fees per television $1.25

  4. Imagine you are buying gaskets. Your supplier calls you up with bad news: The workforce voted to unionize. Labor costs are now going up by 25%! He asks you for a 20% increase in pricing. He tells you that because you are a "customer of choice," he doesn't want to pass along all of the costs to you. You look at your most recent cost breakdown for gaskets (shown below). What are you going to tell the supplier? What is the highest percentage price increase you are willing to accept?

    Supplier Cost Breakdown for Gaskets
    Labor $3.00
    Material $3.00
    Overhead $6.00
    Tooling $1.00
    Total Factory Cost $14.00
    SG&A $1.40
    Total Cost $15.40
    Profit (Industry Standard 10%) $1.54
    Price Paid $16.94

  5. You are responsible for buying a new machine for your company. You will use it to produce a new product that is incredibly important to your company's future sales. You know that this is an important buy. You also know that as important as purchase price is, other factors including maintenance, quality, and disposal will also affect performance. Unfortunately, each supplier's machinery performs differently on each performance dimension. What type of costing analysis should you perform to help you make this decision? Why?

    Now, identify and describe a scenario for which you would use each of the following costing tools: total landed cost, total cost of ownership, should costing, and target costing.

  6. Do a Google search for two examples of "advanced" costing—one where the company used costing well and one where the company failed to use costing appropriately. What happened in each scenario? How did costing impact the outcomes? Why do some companies use advanced costing practices successfully and others don't?

Previous Next