Forest Hills Case Study Essay

According to the case materials, Forest Hill musical composition Company is classified as a small manufacturer, and one that is closely-held. This could lead one to believe that it is perhaps a family-owned business, or at least managed very actively by a few people. monomania must be very hands on and awargon of the business from a micro and large level. in that locationfore, we would classify the company as a small business and ownership is probably structured by one or a few people who argon very involved. FHPC could be even be an S-corp, depending on further information.Forest Hill ope set ups in a very cyclical industry, with upswings every leash to four years, according to the case. This is due to nodes buying a lot of paper during good economic periods. Customers overbuy and atomic good turn 18 left with inventories of paper, and therefore dont buy for a while until another economic sp empathize out occurs. Therefore, the industry is very much affected by the over all macro economy. The industry is excessively being affected in terms of a loss of market sh atomic number 18, because there is a trend toward ductile and the use of more environmentally friendly grades of recycled paperboard. One could argue that the industry and market is mature, and even declining. other aspect to consider about this industry is that it is one that has barriers to entry. The cost of starting a manufacturing company are high. It is not an industry with small capital outlay. Also, there are regulations in manufacturing which could keep competition from arising.We read in the case that Forest Hills is a small company competing against bigger companies in a commodity market. Therefore, FHPC has taken the strategy of differentiation. They have tried to offer a comprehensive amount of harvests and services, but are trying to stand out from the crowd by offering exceptional service and rapid responses to guest indispensablenesss. Unlike the bigger companies, FH PC could develop more of a relationship with eachcustomer, and take more time to listen to their need and meet customer needs more efficiently. The strategy of differentiation shows their desire to build a niche based, not so much focused on innovation, but on customer service. Hopefully customers will appreciate the service, and want to continue business with FHPC as opposed to the bigger companies.There are many examples of complexities that drive overhead costs for FHPC. One of the complexities is that the company offers a variety of products, with more or less different processing for each product. We read that the company tries to manufacture products in an rove that decreases costs, such as keeping similar processes together. Even so, the changes in process and equipment needed drive overhead costs up with so much variety in products and steps in the manufacturing process. separately time another product is added, or even changed slightly, costs are incurred and will driv e overhead in terms of change magnitude material costs or manufacturing costs.If Forest Hills is serious about meeting their customers individual needs, they also need to understand that each customer differential comes with greater overhead costs. The specifics of each customer desire causes complexity. We would also argue that another complexity of overhead costs is due to the cyclical nature of the business. There are times of large quantity of output, while other times production would be down as the demand decreases. This makes it difficult to predict and measure overhead costs, as the output of production varies. The management must truly try to understand their fixed and variable costs and how to balance times of boom and retraction appropriately and efficiently.Capturing Manufacturing CostsThe current cost dodge allocates manufacturing overhead based on the amount of young materials consumed in the production process. It applies the aforementioned(prenominal) overhead a t a rate of $1.05, per $1.00 of raw materials consumed. Given the real data gathered in exhibit 2, the rate appears to adequately account for the sum of overheads generated, as prove by the table belowCost of a Grade ChangeFHPC produces 20 different grades of paperboard. Each grade is unique and the amount varies so some batches maybe very large and some quite a small. The company practices lean manufacturing so successive batches of similar grades are grouped together in order to reduce waste. The cost of a grade change includes the following depreciation, labor, energy, other and lost chemicals. Assume 4 grade changes in total from the information provided.Cost to Slit a Reel of PaperboardA parent roll of paperboard is 12 feet long. Food processors require widths of 18 inches. This means that three slits must be made to produce 3 18 rolls. Approximately 6 inches of waste is produced by creating 3 18 rolls. Only grade A and grade C are slit. A total of 85 reels are producedeac h reel requiring 3 slits. A total of 255 slits are made. The overhead for slitting is $195,000 for slitting. The overhead rate per slit is $764.71. Assuming 3 slits per reel the total cost for slitting a reel is $2,294.12. Summary listed below. natural Volume-based Overhead RateIf Forest Hill removes the overheads traceable to grade changes and slitting from total overhead, the application rate needs to be adjusted. An appropriate application rate for the remaining OH can be calculated by dividing the aforementioned OH by the sum of RM costsActivity Based Costs Grades A-DIf an activity based cost system were to be implemented, the parent reel costs (for the same level of activity indicated in exhibit 1) could be estimated as followsActivity Based Costs and Volume Cost Percent ChangePrepare a table that illustrates the office change in costs between the volume-based system and the strategic activity-based system.Conclusions and RecommendationsWhat conclusions can you eviscerate fr om your analysis? As a consultant to Forest Hill, what actions would you recommend?12. The analysis above shows the concerns of management were accurate. The costs of A and C were understated because the costs related to the slitting operation were unfairly being allocated to other grades. Grades B and D do not consume any of the slitting department resources, thus should not be amenable for the absorption of said departments overhead costs. In addition, the economies of scale being generated by high volume gross sales were being unfairly distributed to low volume grades.This is evident in thecost of grade B, which was previously barely being allocated $140 of total grade change costs (grade change as a percentage of total OH, multiplied by total overhead allocated to grade B). Given that grade changes are only if incurred if a grade is run, it makes more sense to allocate costs based on the actual number of a production runs, as opposed to how much material was consumed in a ru n, which has no military posture on the number of set-ups required.