The Encoder Device division (EDD) at Digital Communications is a producer of communications devices for Government Agencies in the United States. The company works closely with Government Agencies and due to the nature of the devices they produce, and their application the Company works on a 'need to know' basis and as such production departments are compartmentalised.
Production of Voice Ratio Encoding (VRE) devices is on going, however a new microprocessor has been developed, rendering the existing microprocessor obsolete. As a consequence the microprocessor needs be fitted to all existing devices in the 'field' and all new devices in production. EDD wish to win this 'replacement contract'.
EDD have vast experience in 'ground up' bids for entire programmes but not on single sub-assemblies for resale. EDD are confident that they understand their business well, however they fear they lack the detailed information about the costs associated with sub assemblies.
They wish to make an attractive but profitable bid for the contract.
STRUCTURE OF EDD.
EDD has four separate production departments: Data Encoding (DE), Video Encoding (VE), Voice Ratio Encoding (VRE) and Variable Wire Encoding. This specific contract is exclusive to VRE.
EDD therefore need to ensure that they have the correct division of costs between each production department and that the cost for each department is then split correctly between the underlying manufacturing processes within the department.
EDD AND ACTIVITY-BASED COSTING.
EDD has already completed a great deal of work for "Activity Based Costing" (ABC), however their actual costing system needs to be capable of allocating the costs of multiple support departments in a refined and appropriate manner. As EDD has good product diversity, broad allocation of costs has becoming increasingly inaccurate and has probably already lead to either product 'overcosting' or 'undercosting' or both. A refined costing...