Sunday, April 6, 2008

Internet tour on Steinway & Sons, the Hershey's Company and Southest Airlines

Steinway and Sons

1. Company Introduction

Steinway & Sons was founded by Henry Engelhard Steinway in 1853 in New York, the USA. The company’s business is family owned, and is specialized in producing high quality pianos with 114 patented inventions in developing the sound quality of a piano. In 1867 Steinway and Sons was awarded the prestigious "Grand Gold Medal of Honor" at the Paris Exhibition for excellence in manufacturing and engineering pianos and considered as an internationally recognized. Being well-known from that time, today, Steinway & Sons annually crafts approximately 5,000 pianos worldwide.

2. The production process of Steinway

Normally it takes about 8 months to complete a piano. The production relies on high skilled craftsmen. Please see the Figure1 for further clarifications on production process.

3. Steinway’s costing system

Steinway is likely to have a job-order costing system as the number of pianos produced a year is really small (5000). Moreover, the pianos are generally large, unique, quite expensive and built-to-order. Due to small production volume and size, costs occurred in production process are traced to each piano. Therefore a job-order cost system is suitable for Steinway’s special production environment.

4. At Steinway an example of …

a) Direct material includes wood and components such as iron plates, strings and etc.

b) Indirect material includes graphite, glues, coatings, packing and etc.

c) Employees who are classified as indirect labors are wood processing operators, office
staff and management board

d) Types of manufacturing overhead costs are wages, facility depreciation, utility cost, facility
insurance and etc.

5. The allocation basis for Steinway’s manufacturing overhead

The Steinway is likely to use direct labor or direct labor dollar cost allocation basis to allocate the manufacturing overhead cost, because (i) the production process of piano is handmade, (ii) all steps in making pianos are performed by high skilled workers, and (iii) there is quite small involvement of equipment in the production process.

6. The Steinway’s largest fixed cost

The largest fixed cost of Steinway is [fixed] salary paid to its high skilled employees, because of nearly handmade production process and probably the largest portion of its cost components.

The Hershey’s Company

1. Company introduction

Hershey Chocolate Company was established in Lancaster, Pennsylvania, USA in 1894. Having employed approximately 14,000 of staff The Hershey’s is the world’s largest chocolate manufacturing company, producing more than a billion pounds of chocolate products annually. Its revenues are more than $4 billion and they have been exporting to over 90 countries of the world.

2. The production process of Hershey

The production process of Hershey’s chocolates is clearly depicted in Figure 2.

3. Hershey’s costing system

Hershey’s costing system is likely to use process costing system because (i) their products are homogeneous in nature of origin and rigorous in size, (ii) have almost identical production process and (iii) require almost same ingredients in high volumes. Thus it is difficult to trace the overhead cost of each product (for example one piece of “kiss” chocolate).

4. At Hershey an example of …

a) Direct material is Cocoa pods, milk, sugar, and Cocoa butter

b) Indirect materials is wrapping materials/papers, almonds, other types of nuts and etc.

c) Employees who are classified as indirect labors are machine operators, quality control
and administrative staff (e.g. security guard etc)

d) Types of manufacturing overhead cost are wages, depreciation of an equipment, utilities
and facilities.

5. The allocation basis for Hershey’s manufacturing overhead cost

Hershey is likely to use Machine hour (MH) based cost allocation system to allocate the manufacturing overhead cost, because (i) the production process is almost fully automated, and (ii) it is a mass production of nearly identical products at high volumes. So other cost drivers such as direct labor are not appropriate in this system.

6. Hershey’s largest fixed cost

We assume, that Hershey’s largest fixed cost is depreciation cost of process machines, because this factory is highly automated. The other possibilities such as salaries are relatively of small portion in total fixed cost.

Southwest Airlines

1. Company introduction.

Southwest Airlines Co. ("Southwest"), incorporated in Texas, started its business on June 18, 1971 with three Boeing 737 aircraft serving three Texas cities- Dallas, Houston, and San Antonio in USA. The company founded by Mr. Rollin King and Mr. Herb Kelleher is now operating to 61 airports in 31 states throughout the United States with 445 Boeing 737s as the nation’s fifth largest domestic carrier in America. It is the nation’s low-fare, high customer satisfaction airline and well known for the lowest operating cost structure in the domestic airline industry. In 2005, they recorded their 33rd consecutive year of profitability that is exception in the commercial airline industry history in US.

2. Key success factors.

They chose a different business model targeting business and leisure travelers. In this business model, they chose mid size airports, point-to-point service, single-class seat arrangement, and automated ticketing. Their key success factors are short haul time, point-to-point flight, scheduling (frequent flights), airport selection (less congested, mid size, less costly), simplified procedures (gate, check-in, in-flight), ground operation (well trained ground crews, Boeing operation-full efficient), use of automation, highly competent staff and professional management team. Their main values are low fares, reliable service, frequent and convenient flights to great destinations, comfortable cabins, great in-flight experience, top-rated frequent flyer program, hassle-free airports, and friendly Customer Service.

3. Assumptions on Southwest Airlines’s cost calculation.

Airlines usually provide traveling services to their passengers where distance is the object to measure the costing of operation. Here, kilometers or miles can be used to measure the physical distance. In an airplane, capacity to provide with passengers to travel is also to be considered for operating costs by the number of seats available. Since miles are counted traditionally in measuring distance in airline industry, we assume that Southwest Airlines calculate their cost on the basis of available seat miles (ASMs).

Cost object is the responsibility centers, products, or services to which costs are to be assigned. Here, we think ASMs is the cost object for Southwest Airlines in the final stage. For further information please see Figure 3.


muna said...

Dear PHAM THUY HA, where I can find figure 1,2, and 3 ? Thank you for this article. It helps me much

bbislyjl said...

Would someone mind sending me the detail. Much thanks

Jenny said...

Can someone mind sending me the calcualations on this case. I'm having a hard time. This is a great article and it will help me a ton!! Thanks!