1) Prepare a report addressed to the management of Eastclock Corporation which clearly identifies and analyzes the issues it faces, and make specific recommendations for improvement.
Analysis
Although the company's main concern is the decrease of its sales over the past 3 years, the revision of the cost system has attracted our attention. The company defines the price of its products base on the product's profit margin, knowing that it is important to evaluate the company's cost practices in order to determine whether it cost system best fit to its activities or not.
The investigation reveals certain information that could be useful to improve the current cost system. Conversations with different department representatives reveal that some of them have detected a casual relationship between each product and the amount of work required by each one. The Engineering Department has identified that with the current mix of product their time is split in approximate 75% Custom, 20% Deluxe and 5% Standard. The Quality Control department has also identified that with current mix, their time is split among product in the follow relation: 60% Custom, 20% Deluxe and 20% Standard. On the other hand after talking to the supervisor of machining and assembly, we discovered that costs labeled "Other Manufacturing" are distributed among product in proportion of the product volume of sales, although, there is not an casual or observable relationship between volume of sales and these costs.
Other fixed costs such as Depreciation and Selling and Administrative are distribute according to direct labor dollars and volume of unit sold respectively.
Recommendation for improvement
1.- Change the allocation criteria for Engineering Department ...