Essay About Cost Of Sales Direct Material And Lower Production Cost

Bridgeton Industries
Bridgeton Industries – ES1 Wen (Vincy) ZHANGIn 1980s, Bridgeton suffered from both a shrinking domestic market due to the scarce and expensive gasoline, and loss in market share to foreign suppliers entered U.S. market at a lower price. To compete for a smaller pool of production contracts, Bridgeton need to keep a lower production cost thus competitive price. Bridgeton’s actions to solve this problem are, 1) outsourcing products in cost disadvantage 2) reducing costs of remaining products.Bridgeton tried to apply product costing to calculate costs for each product. Besides cost of Sales Direct Material, Direct Labor, they allocated Overhead according to the weight of Direct Labor of each product.Though Bridgeton outsourced oil pans and muffler-exhaust, some of the overhead costs hadn’t been moved proportionally, and had been absorbed by the rest three products. As to be seen in below table, the percentage of Overhead to total production cost increased from 18% in 1988 (before outsourcing) to 21% in 1989 (after outsourcing), and stayed almost same in 1990 which is 20%.1987198819891990Sales330,15456%351,07157%216,33858%226,54258%Direct Material122,36521%127,36321%66,95618%69,54618%Direct Labor24,6824%25,2944%13,5374%14,1024%Overhead107,95418%109,89018%78,15721%79,39320%Total585,155613,618174,988389,583In addition, since Overhead was allocated according to Direct Labor, Manifolds as the most labor-intensive product covered about a half of Overhead after outsourcing. As showed in below table, percentage of Overhead for Manifolds increased from 17% in 1988 to 21% in 1989 and 1990. This bigger proportion of overhead cost became a burden of Manifolds in classification system, and led to its fallen from Class II to Class III.