# John Deere Component Works Essay

1166 Words Nov 22nd, 2008 5 Pages
CASE ANALYSIS REPORT

Managerial Accounting: John Deere Component Works.

John Deere Component Works (JDCW), subdivision of John Deere and Co. was in charged specifically of the manufacturing of tractor component parts. The demand for JDCW’s products had problems due to the collapse of farmland value and commodity prices. Numerous and constant failures in JDCW’s competition for bids, alerted top management to start questioning their current costing methods. As an outcome, the analysis has to be guided to research on the current costing methods with the intention of establishing legitimacy and to help the company in adopting a more appropriate costing system.

Q1. How did the competitive environment change for John Deere Company
An implication would be that it would be more expensive to use ABC.

Q4. Compare the cost of the product A103 (See Exhibit 5) under the existing cost system and under the ABC approach.

STANDARD METHOD

Total Cost = Direct Labor + Direct Materials + Overhead
Direct Labor = .185 labor hours * 12.76/hr = \$2.36
Direct Materials = \$6.44
Direct Labor OH = 2.05 * .185 * 12.76 = \$4.89
Machine Hours OH = 27.56 * .310 = \$8.54
Materials Handling OH = .097 * 6.44 = \$0.62
Total Cost (per 100 parts) \$22.88

ABC METHOD

Total Cost = Direct Labor + Direct Materials + Overhead
Direct Labor = .185 * 12.76 = \$2.36
Direct Materials = \$6.44
Labor Support OH = 1.11 * .185 * 12.76 = \$2.62
Machine Operation OH = (8.99 + 6.71) * .031 = \$5.15
Machine Setup OH = (33.76 * 4.2 * 2) / 80 = \$3.54
Production Order OH = (114.27 * 2) / 80 = \$2.86
Materials Handling OH = 19.42 * 4 = \$0.97
Parts Admon. = (487 * 1) / 80 = \$6.09
General + Admon. = (.091 * 12.76) * (.187) + 21.23 = \$2.14
Total Cost (per 100 parts) \$32.21

The above charts show a clear comparison of the two cost systems for part A103 highlights the discrepancy. Under the Standard Cost system, part A103 costs \$22.80 while under the ABC method, the part costs \$32.18.

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