Essay about Jdcw Hbr Case Study

1620 Words Nov 19th, 2014 7 Pages
John Deere Component Works (A)

A.1. How did the competitive environment change for the John Deere Component Works between the 1970's and the 1980's? What information must management accounting systems provide to support effective decision-making in these different environments?

The change in the competitive environment greatly influenced JDCW. The early 70s were the end of the post WWII boom period, during which time JDCW was expanding its operations and operating many of its manufacturing plants at capacity. However, there were multiple economic factors in the early 80s that negatively affected the demand for JDCW products. The effect of these economic factors is evidenced in the case study by the fact that during the 1970s
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The existing cost system was created when John Deere was growing and supplying all of their own components, specifically focused on tractors. They were running lots of parts numbers, but never really looked at the costs of individual parts. The quality assurance department did not compute material usage variances, even though direct materials were used to allocate overhead, leading to inaccurate estimates of material costs in producting the machine parts. The system was focused on the efficiency of the whole rather than the efficiency of making the parts.

The exiting cost system’s failures were exposed during their bid on 275 machine parts. Only 58 of the parts were awarded to their divisions for being the low bidder on a full-cost basis, most of which were low-volume and unattractive to make. Internal divisons started buying outside as the bids from inside were no longer competitive.

A.4.

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Analysis:

The limitations of the existing cost system were overcome by the ABC system as the ABC further broke down overhead into seven cost pools, each having their own cost driver. This allowed for machines to be examined individually and helped develop separate rates for four different size machines. Packet, pg. 18. Thus, “machines that happened to have a lower load would not be penalized by a higher rate.” Id. In turn, this prevents the misallocation of cost. The various Cost Pools and their perspective

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