Case 19-1Bennett Body Company
1
Bennett Body Company
Ralph Kern, controller of Bennett Body Company, received a memorandum from Paul Bennett,
the companys president, suggesting that Kern review an attached magazine article and
comment on it at the next executive committee meeting. The article described the Conley
Corporations cost accounting system. Bennett Body was custom manufacturer of truck
bodies. Occasionally, a customer would reorder an exact duplicate of an earlier body, but
most of the time some modifications caused changes in design and hence in cost.
The Conley System
Kern learned from the article that Conley also manufactured truck bodies but that these were
of standard design. Conley had 12 models that it produced in quantities based on
managements estimates of demand. In December of each year, a plan, or budget, for the
following years operations was agreed on, which included estimated of costs and profits as
well as of sales volume.
Included in this budget were department-by-department estimated costs for each of the 12
models of truck bodies. These costs were determined by totaling estimated labor at an
expected wage rate, estimated materials at and expected cost per unit, and an allocation for
overhead that was based on the proportion of estimated total overhead costs to estimated
total direct labor dollars. The sum of the labor, materials, and overhead estimates for each
model became the standard cost of the model
No attempt was made in Conleys accounts to record the actual costs of each model. Costs
were accumulated for each of the four direct production departments and for several service
departments. Labor costs were easily obtainable from payroll records, since all employees
assigned to a production departments were classified as direct labor for that department.
Material sent to the department was charged to it on the basis of signed requisition slips.
Overhead costs were charged to the department on the basis of the same percentage of direct
labor as that used in determining the standard cost.
2
Since Conleys management also knew how many truck bodies of each model were worked
on by each department monthly, the total standard costs for each department could easily
be calculated by multiplying the quantity of that model produced by its standard cost. As the
year progressed, management watched closely the difference between the departmental
actual cost and standard cost.
As each truck body was completed, its cost was added to finished goods inventory at the
standard cost figure. When the truck body was sold, the standard cost became the cost of
sales figure. This system of cost recording avoided the necessity of accumulating detailed
actual costs on each specific body that was built; yet the company could estimate, reasonably
well, the costs of its products. Moreover, management believed that the differences between
actual and standard cost provided a revealing insight into cost fluctuations that eventually
should lead to better cost control. An illustrative tabulation of the costs for Department 4 is
shown in Exhibit 1. No incomplete work remained in this department either at the beginning
or at the end of the month.
EXHIBIT 1 Summary of Costs, Department 4, November
Material Labor Overhead Number
Of Bodies Per Unit
Total Per Unit
Total Per Unit
Total
Model 101 109 113 154 Total standard Actual costs Variances
10 8 11 20 49
$ 1,415 1,890 2,885
895
$ 14,150 15,120 31,735
17,900 $ 78,905 83,738 $ -4,833
$ 2,079 1,656 1,984 1,832
$ 20,790 13,248 21,824
36,640 $ 92,502 94,026 $ -1,524
$ 2,079 1,656 1,984 1,832
$ 20,790 13,248 21,824
36,640 $ 92,502 94,026 $ -1,524
3
The Bennett System
Because almost every truck body that Bennett built was in some respect unique, costs were
accumulated by individual jobs. When a job was started, it received a code number, and costs
for the job were collected weekly under that code number. When materials used for a
particular job were issued to the workers, a record of the quantities issued was obtained on a
requisition form. The quantity of a given materialso many units, board feet, linear feet,
pounds, and so on was multiplied by its purchase cost per unit to arrive at the actual cost
of material used. Maintenance of cumulative records of these withdrawals by code number
made the total material cost of each job easy to determine.
Likewise, all labor costs of making a particular truck body were recorded. If a worker moved
from job to job, a record was made of the workers time spent on each job, and the workers
weekly wages were divided among these jobs in proportion to the amount of time spent on
each. Throughout the shop, the time of any person working on anything directly related to an
orderJob No.437 for examplewas ultimately converted to a dollar cost and charged to
the job.
Finally, Bennetts overhead costs that could not be directly associated with a particular job
were allocated among all jobs on the proportional basis of direct labor-hours involved. Thus,
if in some month 135 direct labor-hours were spent on Job No.437, and this was 5 percent of
the 2,700 direct labor-hours spent on all jobs at Bennett that month, then Job No.437 received
5 percent of all the overhead cost-supplies, salaries, depreciation, and so forthfor that
month.
Under this system, Bennetts management knew at the end of each month what each body
job in process cost to date. They could also determine total factory cost and therefore gross
profit at the completion of each job.
4
The note that Mr. Bennett attached to the magazine article read:
Questions:
1. As Mr. Kern, what would you be prepared to say in response to Mr. Bennetts
memorandum?
2. How, if at all, should Bennett modify its present system?
Ralph:
Please review the system of cost accounting described in this article with the view of possible
applications to our company. Aside from the overall comparison, I am interested particularly in your
opinion on:
1. Costs of paperwork and recordkeeping, as compared with our system.
2. Possible reasons for cost differences between the actual and standard costs under Conleys
system.
3. How you think Conley develops the Standard cost of factory overhead for a particular model
for the purpose of preparing the budget.
4. Whether you think that we should change our period for determining the overhead allocation
rate from monthly to annually. If so, why?
5. Which system is better from the standpoint of controlling costs?
These are just a few questions which might be helpful in your overall analysis. I would like to
discuss this question at the next executive committee meeting.
Thank you
Paul Bennett
