Cost System Evaluation Rubber Enterprise Case Study

ME2605 – Cost Management

Fouad El MernissiFrederico OttoniLorena CalvoPablo Abad

Situation DescriptionBrazilian Company

120 employees

Anual income = R$ 12 million

Products: Rubber Technical Components

Process Description

Low Complexity – 4 main processesHigh Variety – 300 different products Intensive hand labour (61% of total costs for workers’ wages)

Mixture Vulcanization Finishing Packaging

Low Complexity High Complexity

High Automation

Intensive Labour

High Automation

Intensive Labour

High Volume and Low Variety

Cost centres ABC ABC or Process costing

Process Costing

Low Volume and High Variety

ABC Cost centres ABC or Process costing

Process Costing

Source: Brunstein et all, 2001

Cost SystemRaw

Materials

Direct Operational Expenses

IndirectOperational Expenses

Administrative Expenses

Standard Cost

Cost centres

Products Departments

Costs Distribution

Cost Centre DemonstrationCost Items Total cost Percentage Distribution drivers

Wages R$ 159 663,34 61,52% Sector

Utilities 2 R$ 25 578,23 9,86% Several

Meal R$ 23 539,40 9,07% Labour (number)

Electricity R$ 15 386,90 5,93% Consumption

Rent R$ 13 370,16 5,15% Area

Depreciation R$ 10 819,01 4,17% Per group

Utilities 1 R$ 7 591,92 2,93% Several

Insurance R$ 3 113,43 1,20% Labour (number)

Water R$ 449,00 0,17%Labour (number) or consumption

Total R$ 259 511,39 100,00%  

Cost Center Category PrimaryCost Percentage %Administrative Administrative R$ 35 762,57 12,96Comercial adm. Administrative R$ 6 783,69 2,46Maintenance indirect R$ 27 640,84 10,01Industrial Adm. indirect R$ 18 880,85 6,84Engineering indirect R$ 8 436,91 3,06Quality indirect R$ 8 242,60 2,99Store indirect R$ 6 644,14 2,41Buildings indirect R$ 3 421,73 1,24Laboratory indirect R$ 3 380,85 1,22Expedition indirect R$ 2 933,91 1,06PCP indirect R$ 2 776,20 1,01Other operations indirect R$ 1 729,65 0,63Compressor indirect R$ 191,22 0,07Restaurant indirect R$ 176,58 0,06Heating indirect R$ 109,98 0,04Tower indirect R$ 65,94 0,02Presses direct R$ 35 426,37 12,83Mixture & Preparation direct R$ 32 409,89 11,74Finishing direct R$ 28 405,83 10,29Presses B6-B7 direct R$ 22 118,41 8,01Finishing Eaton direct R$ 16 634,21 6,03Injector l3 direct R$ 7 865,30 2,85Injector l1 direct R$ 5 993,23 2,17Total - R$ 276 030,90 100

Cost Center Category Primary Cost

Percentage %

Distribuited Cost

Percentage

Presses direct R$ 35 426,37 23,80% R$ 64 848,30 29,95%Mixture & Preparation direct R$ 32 409,89 21,77% R$ 46 201,67 21,34%

Finishing direct R$ 28 405,83 19,08% R$ 31 075,49 14,35%

Presses B6-B7 direct R$ 22 118,41 14,86% R$ 31 462,27 14,53%

Finishing Eaton direct R$ 16 634,21 11,17% R$ 17 899,80 8,27%

Injector l3 direct R$ 7 865,30 5,28% R$ 13 464,39 6,22%

Injector l1 direct R$ 5 993,23 4,03% R$ 11 571,98 5,34%

Total - R$ 148 853,24 100,00% R$ 216 523,90 100,00%

Two-stage process : exampleOverhead cost accounts

Manufacturing, industrial administration, engineering

PressesMixture & Preparation

Injector L1…

Products

Hours Cost centre overheads Overhead rates

Presses: (machine hours) 200000 64848,3 0,324

Mixture and preparation: labour hours 100000 46201,67 0,462

Finishing ( labour hours) 100000 31075,49 0,311

Inject l1 (machine hours) 100000 11571,98 0,116

UnitsCost per unit or per

hour Machine hours Cost

Direct cost 10000 1,08 10800Overhead allocation 0Presses 0,324 0,01 32,4Mixture and preparation 0,231 0,05 115,5Finishing 0,311 0,04 124,4Inject l1 0,116 0,01 11,6Total cost 11083,9Cost per unit 1,10839

Rubber ring

Conclusions and Suggestions

Accounting Focus Management FocusPossibility of applying multiple methods in the

companyImportance of identifying the information’s cost-

benefit

Raw Materials

Direct OperationalExpenses

IndirectOperationalExpenses

AdministrativeExpenses

Products

CostCentres

StandardCost

Products

ActivityBased

Costing

Departments Losses Process Services