John Deere Component Works
Background:
John Deere Component Works (JDCW), subdivision of John Deere and Co, was in charged specifically of the manufacturing of tractor component parts. The demand for JDCW’s products had problems due to the collapse of farmland value and commodity prices. By the mid 1980’s, JDCW found that the available excess capacity was increasing, it decided to take advantage of the efficiencies of the newly acquired automatic turning machines by bidding on parts offered from within the country. But ultimately, JDCW only bid successfully for 58 parts out of 275 parts, worse still, the 58 parts were all low volume parts, contrary to its aim to attain the bids that offered the higher volume parts. The failure in its competition for bids made management question about its current costing system. As a result, we have to analyze the current costing methods to determine the validity and to help the company adopt a more reasonable costing system.
Assignment Questions:
Q3:
JDCW was established as the subdivision of John Deere Company during the 1970’s when the demand was increasing. JDCW had been structured to be a captive producer of parts for Deere’s equipment divisions, particularly tractors. During the mid 1980’s, the Gear and Special Products Division of JDCW decided that the complex machined parts would make full use of the excess capacity, then more automated machines developed leading to the increased manufacture overhead costs. As a result, the company changed its production process from labor intensive production process to a more automated system.
Under the current costing system, JDCW had three cost pools (direct labor hours, ACTS machine hours and material dollars) with cost drivers for each; JDCW recognized the variable and non-variable overhead (direct and period) costs; JDCW used the “normal volume” to establish overhead rates. The