Case Study on Cemex - Managerial Accounting

Company Background

CEMEX ® (Cementos Mexicanos) fabricates large concrete slabs. The company had achieved

remarkable growth in recent years, becoming an important player in the production of

specialized concrete slabs that are used in commercial buildings and high rises. Despite its rapid

growth and rise in sales, CEMEX has experienced a significant rise in production costs recently,

forcing managers to look into the causes of this problem. To better manage production costs,

assume that you and your teammates were hired by the company as cost accountants to help

them design a standard costing system to monitor production costs at the concrete slab factory.

Setting Cost Standards

To gather information for creating the cost standards for the fiscal year (2017), you first studied

the accounting and production records for the past year. Then, you reviewed the 2017 fiscal

year’s production scheduled, which showed a planned production volume of 90,000 concrete

slabs.

Direct costs standards

You also identified the following production inputs and direct costs for producing the slabs:

cement mix, sand, water, and direct labor. Because sand and water are readily available at a plant’s

reservoir, the company does not incur any costs for these two inputs. Therefore, the only material

cost incurred is for the cement mix. After speaking with process engineers, the standard cost per

cement mix is set at $10 per ton of cement. You also estimate that it should take about 1 ton of

cement mix per each slab of concrete.

In addition, the cost standard for direct labor is set at $10 per hour, and the standard of quantity

of labor required to produce 100 slabs of concrete is set at one direct labor hour. In other words,

it costs about $0.10 cents in direct labor to produce one single concrete slab.

Manufacturing overhead cost standards

You turn next to estimate manufacturing overhead costs. Variable overhead costs consisted of the

salaries of supervisors, depreciation of equipment, and electricity costs mainly related to the use

of the ovens and machinery. You estimated the fiscal year’s variable manufacturing overhead

costs at $80,000 and decided to use direct labor hours to allocate variable manufacturing

overhead into units of output (slabs). You also estimated that the plant would work 40,000 direct

labor hours on the fiscal year. Thus, the variable overhead standard rate is set at $2 per direct

labor hour.

You then classified all remaining overhead costs as fixed and estimated the fiscal year’s fixed

overhead spending at $180,000. After considering several allocation bases for the fixed overhead

costs, you decided that volume of production would be appropriate as the allocation base to

apply fixed overhead costs. With a planned production of 90,000 slabs for the fiscal year, the

standard fixed overhead allocation rate is set at $2 per unit of output (per slab).