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BENTLEY UNIVERSITY

AC 310 Term Project

Matthew Dalle Ave, Michael Caramadre, Stephanie Filippetti, and Molly Rowe
12/9/2013

The company we interviewed is the Chauenburg Hose Group. The Chauenburg Hose
Group is privately held and located in six different countries with nine manufacturing plants.
Their plants are located in the United States (Nevada, Texas, Massachusetts, Indiana), Germany,
France, Canada, and China. All companies are privately held and individual from each other. All
of these different manufacturing companies produce many different kinds of hoses. Their
products include items such as hoses for the medical industry, home appliance hoses, industrial
hoses, carpet cleaning hoses, blowing hoses, and many other kinds. They currently have about
130 million in sales for the year. For the sake of our project, we will focus on the American
location known as Flexaust for our numerical example but we will still touch on the company as
a whole in regards to its costing methods.
Flexaust is a manufacturing company headquartered in San Diego, California but with a
manufacturing facility in Amesbury, Massachusetts. The company has manufactured flexible
hose and ducting for industrial and commercial applications for over 75 years. Flexaust produces
a variety of hose products for applications involving areas such as air, dust, fume, and
lightweight materials. In total, the company has twelve different brands (Flexaust).
Manufacturing overhead allocation is an important aspect of manufacturing companies.
Activity based costing and activity based management are a set of tools adapted by some but not
all companies. Flexaust is not a company who has adapted the ABC method of accounting. For
many years, there has been focus on developing a more sophisticated costing system. Certain
systems in place currently use only one cost driver, distorting the overall cost estimate. Because
of this, researchers have dedicated time towards eliminating or mitigating such limitations. As a
result, activity based costing (ABC) systems have received attention (Velmurugan).

Activity based costing is a system for allocating manufacturing costs to various products.
Under ABC costing, costs are assigned based on specific activities. As a result, costs are
assigned more accurately than traditional methods. The greatest benefit of the ABC system is the
less arbitrary method of assigning costs. Because companies assign costs to only the products
requiring the activity rather than to each production activity, the cost of manufacturing a specific
product becomes more accurate and, as a result, the information is more useful to management
(Johnson). However, implementation of an ABC system requires a large amount of resources.
For smaller companies, ABC costing may not be feasible due to limited funds. Additionally, if
management does not have the knowledge to interpret the information provided by an ABC
system, the information may be misconstrued (Johnson).
The way the Chauenburg Hose Group allocates its overhead and indirect costs is very
different from ABC costing and the standard costing systems for large companies. Chauenburg
Hose Group has all the normal indirect overhead costs that any manufacturing company would
have such as quality staff, production management staff, maintenance staff, utilities, rent for nonowned entities, and miscellaneous. But costs they also include in their indirect overhead are all
benefits for employees as well as any overtime even though these should be costed to direct
labor. We were not able to get a reason for why this is done but we can assume after
understanding how they allocate their indirect overhead that putting these direct costs into the
indirect overhead saves them money.
Chauenburg Hose Group allocates there overhead as a percentage of their Direct
Materials and Labor costs based on their P&L. The way this works is that they calculate their
Direct Materials and Direct Labor Cost and then judging from their P&L they calculate a
percentage of indirect costs they incurred over the period and charge that from their Direct Costs.

For example, if Direct Labor was ten dollars and direct materials were forty dollars, the total
direct cost is fifty dollars. If they then determine that their indirect costs are thirty five percent
based on the P&L, they then multiply that thirty five percent with the total direct costs to
determine how much they should allocate for their indirect overhead. This would add an extra
seventeen dollars and fifty cents equaling a total cost of sixty seven dollars and fifty cents. This
is applied in a general sense over the whole entity and does not allocate to specific products that
are made. This process is also individual to each manufacturing plant and it is not done for the
whole group. This is a way to protect the whole company from going down if one company falls.
With this costing system based on their P&L it means the more they sell the less significant their
indirect overhead is as a cost and the less they have to pay.
We asked Richard Meyer, the President of the company, if he was satisfied with the
system and if he would consider changing the system. Over all he saw more benefits than flaws
the system and said it has worked for him for the whole time he has been part of the company
and did not see a reason to change it now. With a company that made 190 million dollars this
year and a costing system that most likely saves them money in their allocation of overhead, Mr.
Meyer is very satisfied with his system.
While the costing system that the Chauenburg Hose Group uses has its benefits, there are
also flaws to the system that Richard Meyer pointed out. One of the main flaws with their system
of allocating overhead is for new start-ups. The example that Mr. Meyer used was there most
recent start-up in China. Because they were starting the expenditure in China from scratch and
not just buying the company they had a lot of expenses and no income. Because they allocate
their overhead based on a percentage of their P&L statement their overhead costs were being
costed at eighty percent which is extremely high. At this point Richard Meyer realized he had to

stray away from his original costing system of using the P&L to base how much overhead he
was allocating and he had to use projections at where he wanted the China production to be at
and from there created a costing model. Here he had to use fictitious numbers to determine what
percent of overhead they were going to allocate based on analyzing where the company should
be going. With this new strategy he said that China has successfully reached their target of
costing twenty percent overhead.
A second flaw that Mr. Meyer pointed out was if the company was renting manufacturing
space or actually owned it. He said that the company is put at a “competitive disadvantage” if
they rent because it would kill their P&L and return also ruin the costing system. Because of this
the Chauenburg Hose Group owns the majority of their manufacturing building they do not have
to worry about this too much, but there are a few buildings that they do rent and have to change
their system accordingly. He did not go into much detail about how they actually do this but we
assume once again they use fictitious numbers of where they “want” to be as for new start-ups.
After the interview with the Richard Meyer from Flexaust, we realized that he could not
tell us exactly how their costing system for allocating overhead works. It appears that they have
created a custom system. This may benefit those who are familiar with the system, but outsiders
may find it difficult to understand. During the interview, Meyer shared with us that the company
is a very successful venture. This would eliminate the concern for substantial resources needed
to implement an activity based costing system. As the aforementioned sections discussed a few
topics related to the system that Flexaust uses we would like to recommend that they implement
an activity based costing system.

An activity based costing system has a lot of potential benefits. Firstly it would be more
uniform and easier for outsiders examining the company such as an Internal Revenue Service
audit or a new employee to understand. In the article “Adding Value With Activity-Based
Costing” by Kevin Sawyer he adds, “This information can be used to develop a clear picture of
current business processes how this translates into organizational cost and performance.” This
develops the former, speaking to the simplicity of the actual process that are involved in the
costing and overhead allocation of the products a company produces. Epically for a company
like Flexaust that produces many different products and has a large marketability an activity
based costing system could provide many benefits. Benefits like; a more clear idea of how costs
are incurred and provide data as to areas that can be improved. Having the data clearly displayed
would allow managers to make more productive decisions and increase operational efficiency.
Furthermore activity based costing would allow for a streamlined budgeting process with the
historical data that it would present. In conclusion, the activity based costing system would
allow for clearer presentation of data and provide the necessary information for managers to
make more informed decisions.

Works Cited
Flexaust. History, Mission & Vision. 2013. 26 November 2013.
<http://www.flexaust.com/about/history-mission-vision/>.
Johnson, Rose. "Traditional Costing Vs. Activity-Based Costing." Houston Chronicle. Houston:
Houston Chronicle, 2013.
Meyer, Richard. Chauenburg Hose Group Interview Michael Caramadre, Stephanie Filippetti,
and Molly Rowe Matthew Dalle Ave. 25 November 2013.
Sawyer, Kevin. "Adding Value With Activity-Based Costing." Adding Value With ActivityBased Costing. N.p., 18 Nov. 2013. Web. 04 Dec. 2013.
Velmurugan, Manivannan Senthil. "The Success and Failure of Activity-Based Costing
Systems." Journal of Performance Management 23.2 (2011): 2-33.

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