Transcript of Elkay Essay

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Transcript 1. Presented by Mohamed Talaat Ahmed Galal Amr El Sayed Ahmed El Khadrawy 2. Elkay Plumbing Products Division Founded in 1920 with the vision of “Making the best sinks and providing the best customer service”. Elkay ‘s PPD produced sinks, faucets, and fountains for residential and commercial customers. Its estimated sales are about $600 million. 3. Introducing a New Cost System. John Hrudicka, vice president and controller for operations planning and analysis joined the Co. in 2007 when its profit had a started a severe decline. The Co. Managers were responding slowly to the profit decline. One of the Co. managers recalled “ we treated some products and customers as sacred cows, they are untouchable ” The Co. vice president explained “our costing system took weeks to prepare customer P&L and the numbers weren’t accurate. People didn’t believe them and wouldn’t act on them. 4. Introducing a New Cost System. Elkay was applying traditional standard costing system. Their system allocated factory overhead to products as a percentage markup over direct labor cost and corporate overhead as a percentage of sales. Hrudicka thought that activity based costing (ABC) would provide managers with more trusted and actionable cost and profitability information. 5. Introducing a New Cost System. He quickly documented several problems with their existing standard costing system. 1) Standard costing system worked well for measuring the direct costs of production, but could not trace the large sales deductions and costs of serving individual customers. 2) The standard costing system pooled these deductions and costs into large expense buckets and spread them to customers based on case volume or sales. 6. Introducing a New Cost System. 3) Equipment costs were aggregated into the factory overhead account and allocated to products through arbitrary percentage markups over direct labor. 4) The standard costing approach did not reflect the much higher changeover, quality control, and process engineering costs triggered by an explosion in the number of SKU’s. 5) Few of the Co. costs were short-term variable as assumed by the standard cost system. 7. Introducing a New Cost System. Hrudicka scheduled a presentation to the 10 members of the company’s Corporate Executive Council. Their reply “We tried this before, it did not work” Hrudicka investigated alternative ABC software and consulting companies, and selected Acron Systems and Jack Haedicke of Arena consulting,