Case Study john deere PDF

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Case Study John Deere Component Works Background: 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. By the mid 1980’s, JDCW found that the available excess capacity was increasing, it decided to take advantage of the efficiencies of the newly acquired automatic turning machines by bidding on parts offered from within the country. But ultimately, JDCW only bid successfully for 58 parts out of 275 parts, worse still, the 58 parts were all low volume parts, contrary to its aim to attain the bids that offered the higher volume parts. The failure in its competition for bids made management question about its current costing system. As a result, we have to analyze the current costing methods to determine the validity and to help the company adopt a more reasonable costing system. Assignment Questions: Q3: JDCW was established as the subdivision of John Deere Company during the 1970’s when the demand was increasing. JDCW had been structured to be a captive producer of parts for Deere’s equipment divisions, particularly tractors. During the mid 1980’s, the Gear and Special Products Division of JDCW decided that the complex machined parts would make full use of the excess capacity, then more automated machines developed leading to the increased manufacture overhead costs. As a result, the company changed its production process from labor intensive production process to a more automated system. Under the current costing system, JDCW had three cost pools (direct labor hours, ACTS machine hours and material dollars) with cost drivers for each; JDCW recognized the variable and nonvariable overhead (direct and period) costs; JDCW used the “normal volume” to establish overhead rates. The current costing system is simple to maintain, which worked well before 1980’s as the company’s products were roughly the same in “unit and volume” (overhead allocation bases), but when the overhead costs are not driven by labor hours, ACTS machine hours or material costs, the system reflected the inaccurate cost information. (41% of the total overhead costs are independent of units or volumes) In addition, the system did not consider material usage variances---the QA (quality assurance) department should include the usage variances in weekly report to increase the accuracy of the cost structure. Both the weekly and monthly reports only reveal how each department operated rather than evaluating the department performance, leading to no guideline to increase future efficiency. In summary, with the current cost system, the managerial analysis is highly flawed due to a lack of crucial in-depth cost information, especially with the increased usage of automated machines in 1984, which increased overhead costs---driven by other activities not calculated under the

current system. No wonder when Gear and Special Products Division set out to market machine parts to the outside world, the bidding prices under the problematic costing system were not competitive with those of its competitors. Management already knew that key to successfully competition outside is price, JDCW need to adopt a new costing system. Q4: With the increasingly usage of new automated machines at JDCW, the standard costing system is incompatible and makes it difficult for JDCW to obtain correct cost numbers. As the standard system bases the overhead costs on volume related rates, costs that are batch-related, productrelated and facility-related are not accurately allocated, therefore distortions will arise when not all overhead costs are driven by production volume. Under the ABC system, the problem is solved. The ABC method allows overhead costs to be assigned to cost objects (products) according to the proportion of demand that each product places on that activity, then creating more accurate product cost estimates. The ABC method will provide management more accurate cost allocations to make bids that truly represent the production costs. It will be more likely to acquire a high number of bids. As mentioned in the case, the production of low volume parts is less efficient than high volume ones, JDCW aims at attain more high volume bids....