John Deere Component Works
Essay by Kacynyang • February 5, 2017 • Case Study • 527 Words (3 Pages) • 2,623 Views
Case 3: John Deere Component Works
Kaixin Yang
Lei Xiong
Weilu Wang
Zhikun Dou
1/30/2017
A3.
In the 1980s, the farmland values and commodity prices has been collapsed which led to the worst and most sustained agricultural crisis since the Great Depression. In response, Deere adjusted its level of operations downward, cut costs and restructured manufacture process. However, the cost system did not keep up with the new dynamics of the business. The information needed to calculate costs has to be obtained through at least three office including industrial engineering, quality assurance and accounting. There would be lots of mistakes to trace the costs. There is no one responsible for centrally coordinating and compiling this[a][b] information. Since it only allocate overhead on direct labor, machine hours and materials handling, it is not clear which activity is actually generated the overhead. Major factors were being ignored. For example, some fixed costs such as process engineering costs and setup costs were associated with every order, whether the order was fulfilled or not. These order related costs were counted in the general overhead.
Some symptoms including the price of the components is higher than its competitors for the equally efficient machinists and equipments. The transfer fee is too high to encourage the internal sales department to buy its own components. Only 58 out of 275 bided components was taken which is low in volume and below expectation
A4.
Compared to the existing cost system, the proposed ABC system allowed the company to classify cost activities into those overhead pools, and identify cost drivers attributable to the products it produced. The primary drawback of the existing cost system was that it allocated overhead costs by only two accounts, which are direct labor and machine hours. As we can see from the diagram attached, there are many more categories of cost activities and cost drivers in the proposed ABC system. By adopting the proposed ABC system, the company will be able to track its overhead costs much more precisely.
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