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For Situations 1 through 6, provide the following information: a. An estimate of the non-value-added cost caused by each activity b. The root causes of the activity cost (such as plant layout, process design, and product design) c. The appropriate cost reduction measure: activity elimination, activity reduction, activity sharing, or activity selection 1. It takes 45 minutes and six pounds of material to produce a product using a traditional manufacturing process. A process reengineering study provided a new manufacturing process design (using existing technology) that would take 15 minutes and four pounds of material. The cost per labor hour is $12, and the cost per pound of material is $8. 2. With its original design, a product requires 15 hours of setup time. Redesigning the product could reduce the setup time to an absolute minimum of 30 minutes. The cost per hour of setup time is $200. 3. A product currently requires eight moves. By redesigning the manufacturing layout, the number of moves can be reduced from eight to zero. The cost per move is $10. 4. Inspection time for a plant is 8,000 hours per year. The cost of inspection consists of salaries of four inspectors, totaling $120,000. Inspection also uses supplies costing $2 per inspection hour. A supplier evaluation program, product redesign, and process redesign reduced the need for inspection by creating a zero-defect environment. 5. Each unit of a product requires five components. The average number of components is 5.3 due to component failure, requiring rework and extra components. By developing relations with the right suppliers and increasing the quality of the purchased component, the average number of components can be reduced to five components per unit. The cost per component is $600. 6. A plant produces 100 different electronic products. Each product requires an average of eight components that are purchased externally. The components are different for each part. By redesigning the products, it is possible to produce the 100 products so that they all have four components in common. This will reduce the demand for purchasing, receiving, and paying bills. Estimated savings from the reduced demand are $900,000 per year.

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Chapter
Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 12, Problem 12E
Textbook Problem
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For Situations 1 through 6, provide the following information:

  1. a. An estimate of the non-value-added cost caused by each activity
  2. b. The root causes of the activity cost (such as plant layout, process design, and product design)
  3. c. The appropriate cost reduction measure: activity elimination, activity reduction, activity sharing, or activity selection
  4. 1. It takes 45 minutes and six pounds of material to produce a product using a traditional manufacturing process. A process reengineering study provided a new manufacturing process design (using existing technology) that would take 15 minutes and four pounds of material. The cost per labor hour is $12, and the cost per pound of material is $8.
  5. 2. With its original design, a product requires 15 hours of setup time. Redesigning the product could reduce the setup time to an absolute minimum of 30 minutes. The cost per hour of setup time is $200.
  6. 3. A product currently requires eight moves. By redesigning the manufacturing layout, the number of moves can be reduced from eight to zero. The cost per move is $10.
  7. 4. Inspection time for a plant is 8,000 hours per year. The cost of inspection consists of salaries of four inspectors, totaling $120,000. Inspection also uses supplies costing $2 per inspection hour. A supplier evaluation program, product redesign, and process redesign reduced the need for inspection by creating a zero-defect environment.
  8. 5. Each unit of a product requires five components. The average number of components is 5.3 due to component failure, requiring rework and extra components. By developing relations with the right suppliers and increasing the quality of the purchased component, the average number of components can be reduced to five components per unit. The cost per component is $600.
  9. 6. A plant produces 100 different electronic products. Each product requires an average of eight components that are purchased externally. The components are different for each part. By redesigning the products, it is possible to produce the 100 products so that they all have four components in common. This will reduce the demand for purchasing, receiving, and paying bills. Estimated savings from the reduced demand are $900,000 per year.

To determine

Identify the non-value-added cost, root cause and cost reduction measures for each of the given situation.

Explanation of Solution

Identify the non-value-added cost, root cause and cost reduction:

SituationNon-value-added costRoot causeCost reduction
1$22 per unit (a)Process designActivity selection
2$2,900 per setup (b)Product designActivity reduction
3$80 per unit ( c )Plant layoutActivity elimination
4$136,000 per year (d)Multiple (Note)Activity elimination
5$180 per unit ( e )SuppliersActivity selection
6$900,000 per yearProduct designActivity sharing

Table (1)

Working notes:

Calculate non-value-added cost for each situation.

(a)

Non-value-added cost = [((Proportion time taken in traditional method Proportion of time taken in new process design)×Costof labor hour)+((Material required in traditional methodmaterial required in new process design)×cost per pond of material)]=[((0.750.25)×$12)+((64)×$8)]=$6+$16=$22per unit

(b)

Non-value-added cost = (Original setup timeredesigned setup time)×setup cost per hour=(150

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Chapter 12 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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