SummaryIn its inception, the John Deere Component Works (JDCW) was structured to be a captive producer of parts for the equipment divisions of John Deere. The factories were required to purchase all major parts internally, and the corporate policy favoured internal purchasing from JDCW for smaller component parts also (Kaplan, p. 136). The high volume production of the 1970's supported this company objective, and supplying the parts internally gave John Deere a competitive advantage.Changing EnvironmentJohn Deere met with hard times in the 1980's as a result of the collapse of farmland values and commodity prices. The high dollar decreased exports, reducing income for the farmers and consequently impacting the farm equipment producers. Farmer's that had been encouraged to incur considerable debt to expand and increase land holding were now facing foreclosures and could scarcely afford to purchase new equipment. Resale of the repossessed equipment saw a further drop in the market for new equipment (Kaplan, p. 135).This drastic downturn in demand resulted in a significant decrease of employees and some major changes in manufacturing approaches, such as just-in-time production. These changes in the industry also required some necessary changes in the decision making process for the factories. With a competitive and price driven market, the factories could no longer afford to operate under the old corporate objectives of supporting the corporation as a whole, they had to act in their own best interest which included buying components at the best price whether they came from other divisions or from outside vendors.Costing System IneffectiveAfter placing bids on component parts for another Deere division and losing most of them to outside vendors, the Gear & Special Products Division (a component of JDCW) has realized that they are not competitive. They are beginning to realize that they cannot hope to increase production volume by supplying outside companies if they cannot even successfully bid for parts for internal divisions, as their full costs are much higher than industry standards. This division is still using the cost allocation system that was in place in the 1970's when the division was running at full capacity. With the downturn in demand and sales, the division is no longer able to sustain operations at full capacity, but they continue to use the same system, which is not effective when full capacity is not being used. Symptoms of the ineffective costing system are presenting themselves in the over and under costing of the parts that the division has recently bid on as given in Exhibit 1 (Kaplan p. 142-143).With the current system, the allocation of overhead based on machine time is 31.2% greater than the allocation for direct labour hours. Thus, products requiring more machine time will incur more of the overhead resulting in their over costing, and the under costing of products that do not require much machine time.Activity ba...
