INTRODUCTION Shun Electronics Company is a medium-sized firm with in the Malaysian electronics industry. Currently there are two operating divisions, the KB Monitor division which manufactures computer monitors, and the KL Radio division which makes radios. For this case, we will be presenting the side from the KL Radio division. The KL Radio division currently makes two basic radios- a shelf model and a portable model. Each of these models is available in three different versions; a bathroom shower version, a 1950’s metal style cabinet version, and a wooden cabinet version. Altogether there are 6 radios being produced at the company.
The current production process can be seen in three departments, assembly, fabrication and finished goods departments. All three have their own separate functions where the radios are prepped for assembly and testing. Only at the fabrication department is the point where the radios can become separated into their different version and model. The finished goods department gives a final testing and ships the radios out to their intended locations. Up to this point, the KL Radio Division uses a standard cost system, which allows for a standard product cost for each of the radios.
This cost uses direct materials and direct labour costs per radio that is based on standard qualities, expected material costs, and labour cost. All costs are assumed at a normal production volume. ISSUE For many years the company has been using standard cost system in which a standard product cost was computed for each of the six radios on divisional bases, divisions were cost pools used to allocate indirect cost to each type of radio. The budgeted direct material and direct labor costs per radio are based on standard quantities and hours and expected material costs and labor rates, and a standard overhead cost allocation rate is applied.
The percentage used for the overhead rate was derived from the expected relationship between budgeted direct labors, direct materials, and overhead costs, all assumed at normal production rate. Actual costs are collected periodically by the departments for comparison with standard costs of work completed in each of the departments. Overhead costs rates are revised annually but the standard for direct labor and material are only changed when prices, production methods or production designed are changed significantly.
However, an employee of Shun, Manjit, has decided to change the method in which Shun Electronics calculates its costs of its products. Manjit wants to expand the three departmental cost centers to eight, each with its own overhead cost allocation rate. As a result, it appears that the total costs for four of their six radios will increase, while two will decrease. This poses a great deal of issues concerning Shun Electronics: •Standard cost of product change Longer-run functions such as price change, make/buy decisions, financial planning and corporate management evaluation divisional performance are altered significantly •This new costing method may change current incentives of managers •Profit margins for some products decreased while others increased This poses us with three alternatives we can take for Shun Electronics: 1. Continue on with our current cost model 2. Adopt Manjit’s cost model 3. Alter Manjits model and compute new numbers FIRST ALTERNATIVE 1. Continue on with our current cost model With our old model, we will be able to continue onwards with our production.
However, this poses some serious problems for our product cost. As we find out, our current new product cost for some radios are higher than the actual amount, therefore, creating a smaller return on investment. Current long term planning can continue as is, but we must consider that if we accept Manjit’s analysis as an accurate model, we are making errors? At the same time, we must consider that we are not altering our long term decisions, which will be effected by our decisions. SECOND ALTERNATIVE 2. Adopt Manjit’s cost model Adopting Manjit’s cost model provides some very new implementations.
Our current standard costs of radios have changed and we need to address this issue immediately. Our staff members must be able to cope with the short term issues, such as profit margin or return on investment, to long term issues, such as future projections and batch ordering size. Manjits model demonstrates two key points: our current cost model is inaccurate, and our current goals and policies are not matching? THIRD ALTERNATIVE 3. Alter Manjits model and compute new numbers Management can see the steps in which Manjit has processed his numbers for the new cost model. However, we the management, can verify these