How "all-purpose" data can defeat management;

              Misapplied accounting idles two machines
while others work overtime . . .
HOW "ALL-PURPOSE" DATA Cil
by Robert G. Stevens, Ph.D.
Detroit
LIKE MANY OF OUR CLIENTS, the XYZ Company re-evaluated its
burden rates once each year. These burden rates were of the full-absorption
variety and based on estimated volumes as opposed to
practical capacity or normal volumes. Therefore, when volume esti­mates
were low, burden rates were high. If the estimates went up,
the rates would go down.
In their particular industry it was customary to issue bids or quotes
on business, and their cost estimating department was charged with
this responsibility. The cost of a particular item was established by
analyzing blueprints to determine material requirements and to deter­mine
the manufacturing operations which would be required to fabri­cate
the part. The estimated time required to perform each operation
was determined by reference to engineering standards or historical
data concerning past performance on similar products. Direct labor
rates and the absorption burden rates for the various operations were
supplied by the accounting department.
These cost estimates provided a basis for determining selling price
and also became a basis for preparing shop orders. Then the sales
department established the final selling price by adding a standard
markup. Some orders would be reviewed by the sales executive and
the standard markup might be adjusted to meet market conditions or
the quotation might be referred back to cost estimating to explore
the possibility of a more economical way to fabricate the product.
14 THE QUARTERLY