DK bodywork parts Ltd.

"DK bodywork parts Ltd." is a 50 year old family owned business situated outside Tonder. The company manufactures bodywork parts for both cars and trucks, and has just below 3,000 different items in its selection. DK bodywork has 70 employees, of which 10 are administrative (sales, purchasing, accounting, and diverse administration) and 60 work in production. The firm has an annual turnover of 100 million DKK, and annual fixed costs of 20 million DKK.

Working procedure on a front wing/fender

In the firm's selection the item no. F127-98, a front wing/fender for a Fiat 127. The working procedure for the production is as follows:

1. Cut out the basic unit from a 1.5 x 3.2 meter galvanized metal plate.

2. Press the cut basic unit so that it takes the right shape.

3. Prime the wing/fender (degreasing, dipping in paint, and processing in oven)

4. Apply label with barcode and item number

5. Place wing/fender on a rack

6. Internal transportation from production hall to warehouse on a truck.

7. Shipment

Choice of cost calculations

The firm applies different cost calculations in different decision-making situations.

o The contribution margin model is applied in cases of short term optimization, or if there is idle capacity in production.

o The ABC model is applied when the excessive costs, for example, for idle capacity are to be identified. Here, the model relates to the costs for the activities that create earnings, so that the redundant activities can be localized.

o The full cost model is applied when the company has to settle on a "minimum sales price" in regards to the long-term planning of the products.

In the following examples of the margin contribution model, the ABC model, and the full cost model are presented based item no. F127-98, i.e. a front wing/fender for a Fiat 127.

The margin contribution model

The margin contribution model for one unit of the front wing for a Fiat 127:

Direct variable costs:

o Materials, including paint, metal, labels, etc. as well as shrinkage (experienced) 21.50 DKK/unit.

o Wages for production workers, including supplement of 28% for training/education, illness, etc. 24.25 DKK/unit

o Transport of purchases, quality control of raw materials 3.30 DKK/unit

o Power for production machinery 12.00 DKK/unit Total 61.05 DKK/unit

Indirect variable costs

o Safety equipment, work clothes, etc. for production workers 2.30 DKK/unit

o Repair and maintenance of production machines. Distributed using machine hours as distribution key 6.90 DKK/unit

o Control of finished goods 4.20 DKK/unit

o Re-calibration of machines 5.90 DKK/unit

o Insurance of production workers 1.25 DKK/unit

Total 20.55 DKK/unit

Total costs of a single front wing/fender for a Fiat 127 according to the margin contribution model: 81.60 DKK/unit

The ABC model

The ABC model for a single front wing for a Fiat 127

Production unit costs:

o Materials, including paint, metal, labels, etc. and shrinkage (experienced) 21.50 DKK/unit

o Wages for production workers, including supplement of 28% for training/education, illness, etc. 24.25 DKK/unit

o Transport of purchases, quality control of raw materials 3.30 kr./unit

o Power for production machinery 12.00 DKK/unit

o Safety equipment, work clothes etc. for production workers

Distributed using wages as cost driver 2.30 DKK/unit

o Insurance of production workers

Distributed using wages as cost driver 1.25 DKK/unit

Total 64.60 DKK/unit

Production series costs:

o Control of finished goods 4.20 DKK/unit

o Re-calibration of machines 5.90 DKK/unit

Total 10.10 DKK/unit

 
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