Cortland Manufacturing Company Case Study. (Essay Sample)

Cortland Manufacturing Company Case Study
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Cortland Manufacturing Company Case Study
Background
Cortland Manufacturing operates on a national scale in the United States. It has produced various types of computers for the healthcare industry for a long time. Lately, the company has come up with a new product, Cortland 2000, to develop a more sophisticated computing market, which necessitates a different manufacturing process and resources consumed and thus changes the entire company's cost structure. However, the corporation employs a simple work costing method based on machine hours required by items and a 50% markup price period. Furthermore, they typically function on an automated basis and only generate the quantities demanded by their clients.
Problem and Issues
Problem Recognition
Cortland Production is likely to have overpriced its products compared to similar items on the market for several consecutive operating seasons. They are unsure whether its current selling price can pay its true manufacturing cost.
Significant Issues and Rationale
First, the corporation employs an appropriate costing method, which has resulted in product miscosting, particularly since its cost structure has altered with the launch of the new product Cortland 2000. Before the introduction, practically all computers were mass-produced and sold in enormous quantities, allowing the overall overhead cost to be evenly distributed across different types of computers on a wide average basis. However, with the advent of this complex product, which may utilize more indirect resources but was only created in tiny quantities compared to other computers, cost allocations can be skewed by cross-subsidization. It is an indication that the new product may have been over-priced, resulting in product mispricing.
Second, the quantity of overhead costs allocated is large, despite the organization only using a single cost pool. As a result, if the machine hours utilized by each computer do not accurately represent the real level of resources required, the overall overhead expenses for each kind of computer will be severely misallocated. Furthermore, using the standard 50 percent markup pricing strategy and keeping the planned selling price constant would result in a significant disparity between reported and actual operating income.
Theoretical Analysis
According to the cost-benefit analysis, implementing a job-costing system might be an ideal method for businesses that base their output on volume-driving activities. Nevertheless, suppose substantial indirect costs are invested on only one activity driver. In that case, products are manufactured on direct levels of cost order and structure, and the profit or loss situation for a specific product cannot be easily identified. A sophisticated action-based costing system should be implemented on the company.
Orders, setups, batches, and machine hours are only a few of the non-unit activities and cost driers used by the Cortland manufacturing firm. As a result, the hour-based allocation rate for a single machine could precisely represent the real resources needed by each type of computer, especially if a more complicated one went into production. As a result, if they do not modify their costing system by employing the more accurate activity-based cost allocation technique, they will be unable to obtain accurate cost information and, as a result, will make an incorrect price choice.
Calculations and Interpretations –Quantitative Analysis
Calculations
Based on the information in exhibits 1, 2, and 3, we can calculate the cost-related numbers for Cortland 1000 and Cortland 2000 using two different costing techniques (see calculation steps in appendix)
Items

Simple job-costing($)
(Cortland 1000, Cortland 2000)

Activity –based costing($)
(Cortland 1000,Cortland 2000)

Selling prices

4,740;6,702

4,740;6,702

Prime costs

1,200;2,900

1,200;2,900

Overhead costs

1,960;1,568

425:2;740

Unit cost

3,160;4,468

1,625;5,640

Operating incomes

31,600,000;11,170,000

62,300,000;5,310,000

Return on sales

33.33%;33.33%

65.72%;15.85%

Interpretations
. According to the data in the table above, Cortland 1000 has about doubled the cost of the resources it requires, while the new product Cortland 2000 has been under-costed by nearly 21% per unit using the present simple job-costing technique. Consequently, as mentioned in sections 2.2 and 3, the new product has incurred significant overhead charges; yet, these costs are absorbed mostly by the old goods due to their large production quantities under the broad average costing assignment with cost cross-subsidization.
Moreover, the operating incomes generated by two items under two costing methods varies significantly due to differing manufacturing volumes. Due to its real comparatively high return on sales and big sales volume, Cortland 1000 was making double profits than it reported at the present price level determined by a simple markup on product expenses. While Cortland 2000's profit and return on sales were not as large as advertised since its unit price was only marginally higher than its actual expenses by roughly 19 percent.
Recommendations
Based on the above analysis and discussion, Cortland Manufacturing Company should apply an activity-based costing system to budgeting due to changes in the company's production and cost structure. Appropriate pricing that reflects the actual costs incurred in connection with the production of each product
Furthermore, based on the estimates above, the corporation is presently profiting significantly more from Cortland 1000 than from Cortland 2000, despite Cortland 2000's real cost per unit be