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The managerial accounting system at Bridgeton, as it is presented, seems to be lacking
detail necessary for efficient analysis. The sections used are sales, direct material, direct
labor and overhead by account number, each divided into individual accounts and summed
to find totals. There is no separation of fixed and variable costs in any of the accounts,
making it difficult to analyze exactly where operations are costing money and, therefore,
how they could possibly be improved. The presentation of the information groups all sales
together and the different categories of costs together and does not provide for individual
product analysis. The products are analyzed (categorized into classes) based on their costs,
with no consideration to revenues associated with these products, and no real
understanding of the overhead applied to each product. The overhead costs are applied to
accounts based on labor and materials of the company as a whole, rather than using
considerations associated with the individual products.
The presentation of the material is in dollars only. Overhead is applied to products as a
percent of direct labor dollar cost. Factory profit for each year is found by subtracting
direct material, direct labor, and direct overhead costs from total sales. The overhead
percentage is calculated at the same time budgeting and is applied as a single overhead
pool throughout each model year. The consulting company used 435% of direct labor costs
in 1987 for their study; the budgeted was actually 437% (OH/DL=107,954/24,682). A
similar percentage applies in the following year (109890/25294=434.5%). However in the
next two years, after the outsourcing of oil pans and mufflers was enacted, the allocation of
overhead increased to 577% (78,157/13,537) in 1989 and 563% (79,393/14,102) in 1990.
Overhead decreased by approximately $30,000 due to the outsourcing, and direct labor
decreased by approximately $12,000. The changed rates are due to the fact that the
overhead reported in the accounts is not based solely on variable labor, but rather has other
(including fixed) components.
It is difficult to predict without more detailed accounting numbers and without interview
employees exactly which of the overhead costs are fixed and which are variable, as well as
which account is mixed. In reality, most of the accounts will have both fixed and variable
costs. They will have initial costs toget started and ensure that they are available (i.e. fixed
costs), and the more they are necessary (used), the more the costs will increase (i.e.
variable costs). We can, however, make educated guesses as to which accounts are mostly
