Bridgeton Industries Case Write-Up
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Bridgeton Industries Case write-up3. In model year 1988, the overhead rate is 435% (per case), the gross margin as a percentage of selling price for product 1 is 22%, and for product 2 is 20%. In model year 1989, the overhead rate = $79,393÷$14,102 = 563%; the gross margin as a percentage of selling price for product 1 is 10%, and for product 2 is 13%.[pic 1]Table 1Model Year 1988 Model Year 1990Product 1Product 2Product 1Product 2Expected selling price62546254Standard material costs16271627Standard labor costs6363Overhead costs26.10 (6×435%)13.05 (3×435%)33.78 (6×563%)16.89 (3×563%)Cost of goods sold48.1043.0555.7846.89Gross profit13.9010.956.227.11Gross margin22%20%10%13%4. (a) In the case, the cost analysis breaks each product cost into 3 elements: materials, direct labor and benefits, and overhead. The material costs and direct labor and benefits costs can be objectively measured and accurately traced to each product line, while the allocation of manufacturing overhead may be more arbitrary. In this case, the plant applies overhead to products as a percent of direct labor cost. To assess the appropriateness of the overhead costs, one approach is to analyze the overhead account. If a large portion of the overhead account is employee-related and affected by the wage rate (or seniority) of the employees, direct labor costs would be the better allocation base. Otherwise, direct-labor hours would be a better choice. Per Table 2, manufacturing overhead is split almost equally between skill-based (57%) and non-skill-based overhead (43%); therefore, using direct labor cost as an allocation base for all manufacturing overhead may not be appropriate.
Table 2Account numberDescription Skill-based Non-skill-based 1000Wages and benefits for nonskilled hourly personnel $ 7,8061500All plant salaried personnel $ 6,824 2000Production supplies $ 3,7943000Small wearing tools $ 2,5294000All purchased utilities $ 8,8885000Wages for non-production employees with specialized skill classification $ 24,460 8000Depreciation and property tax $ 5,946 9000Various relatively constant personnel-related expenses $ 6,77111000Project expense for M&E $ 5,011 12000Benefits and overtime premium for production hourly works (wages included in direct labor) $ 28,077 14000Benefits for skilled hourly workers (wages included in account 5000) $ 9,784 Total $ 62,321$ 47,569Percentage of total MOH 57%43% (b) Overhead includes both fixed and variable components. When determining whether to outsource or drop any one of the product line in terms of product costs, fixed overhead is irrelevant and cannot be taken into consideration.