Reference no: EM13849483

"I can't believe it. We just went through a study showing how my department could save money by using the central maintenance department. But the first month using the department shows that my costs are up more than 20 percent." Don Thompson, the general manager of the Delta Division of  Ramo Products, had just received his monthly bill for maintenance services and was obviously upset.

TABLE 1

DIVISION   Able Baker Carter	MAINTENANCE HOURS 600 400 200	PERCENTAGE   50% 33%, 17%	ASSIGNED COSTS   $ 60,000 40,000 20,000
Total	1,200	100%	$120,000

TABLE 2

DIVISION	MAINTENANCE HOURS	PERCENTAGE	ASSIGNED COSTS
Able	600	42.9%	$ 55,700
Baker	400	28.6%	37,100
Carter	200	14.3%	18,600
Delta	200	14.3%	18,600
Total	1,400	100%	$130,000

Before converting to the in-house department, the Delta Division had used outside suppliers to its maintenance services, at a cost of $15,000 per month. An internal task force, investigating the use of outside services that were also available internally, had found that all the maintenance needs of the Delta Division could he handled internally. At present, the maintenance department had unused capacity, and the additional services required by Delta could be supplied at an incremental cost of

$10,000. After some assurance that his division's maintenance services could be supplied at this lower incremental cost, Don Thompson agreed to convert from external to internal supply of services.

After receiving a monthly bill for more than $18,000 for maintenance, Thompson demanded an explanation. Phil Johnson, the manager of the maintenance department, provided the following data. Table 1 shows the allocation of' the monthly maintenance department costs of $ 120,000 to the three other divisions of Ramo Products, before handling Delta's requirements: As Johnson explained, "We have to charge out the costs of our division in some equitable manner. We've decided that an allocation based on hours supplied is as good as any." Johnson then showed (see Table 2) how the allocation to Delta was derived on the basis of incremental costs of $ 10,000 and the 200 maintenance hours provided to Delta. The Maintenance Department has a capacity of 2,000 hours.

Your report shall comprise:

1. An executive summary (around 200 words). The executive summary is an excellent summary of the key points of the main report. The problems are clearly identified, the alternatives are developed and the recommendation clearly addresses the problems.

2. The main report is around 2000 words.  There are two parts to the main report which:

a. Analyse on the method used by Johnson to charge for the use of maintenance in Ramo Products. Evaluate the consequences of such a method on Delta and the other business units.  In your report, form an independent opinion as to the suitability of such a method to all the  in-house clients.

b. Develop alternative methods for charging for the use of this internal service department that would provide better incentives for use of this department.  Evaluate these alternate methods with clearly specified criteria of what a good costing system should have. Recommend one costing method which in your judgement addresses the problems the client is facing.  Communicate clearly any limitations to your recommended costing system.

3. Referencing: All assertions and arguments are supported by relevant and verifiable references. Direct quotes constitute less than 5% of the word limit. The Harvard style of referencing is correctly applied and all references in the text are found in the Reference List at the end of the report. The Reference List is excluded from the word limit.