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Tom Young, vice president of Dunn Company (a producer of plastic products), has been supervising the implementation of an activity-based cost management system. One of Tom’s objectives is to improve process efficiency by improving the activities that define the processes. To illustrate the potential of the new system to the president, Tom has decided to focus on two processes: production and customer service. Within each process, one activity will be selected for improvement: molding for production and sustaining engineering for customer service. (Sustaining engineers are responsible for redesigning products based on customer needs and feedback.) Value-added standards are identified for each activity. For molding, the value-added standard calls for nine pounds per mold. (Although the products differ in shape and function, their size, as measured by weight, is uniform.) The value-added standard is based on the elimination of all waste due to defective molds (materials is by far the major cost for the molding activity). The standard price for molding is $15 per pound. For sustaining engineering, the standard is 60 percent of current practical activity capacity. This standard is based on the fact that about 40 percent of the complaints have to do with design features that could have been avoided or anticipated by the company. Current practical capacity (the first year) is defined by the following requirements: 18,000 engineering hours for each product group that has been on the market or in development for five years or less, and 7,200 hours per product group of more than five years. Four product groups have less than five years’ experience, and 10 product groups have more. There are 72 engineers, each paid a salary of $70,000. Each engineer can provide 2,000 hours of service per year. There are no other significant costs for the engineering activity. For the first year, actual pounds used for molding were 25 percent above the level called for by the value-added standard; engineering usage was 138,000 hours. There were 240,000 units of output produced. Tom and the operational managers have selected some improvement measures that promise to reduce non-value-added activity usage by 30 percent in the second year. Selected actual results achieved for the second year are as follows: The actual prices paid per pound and per engineering hour are identical to the standard or budgeted prices. Required: 1. For the first year, calculate the non-value-added usage and costs for molding and sustaining engineering. Also, calculate the cost of unused capacity for the engineering activity. 2. Using the targeted reduction, establish kaizen standards for molding and engineering (for the second year). 3. Using the kaizen standards prepared in Requirement 2, compute the second-year usage variances, expressed in both physical and financial measures, for molding and engineering. (For engineering, explain why it is necessary to compare actual resource usage with the kaizen standard.) Comment on the company’s ability to achieve its targeted reductions. In particular, discuss what measures the company must take to capture any realized reductions in resource usage.

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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 27P
Textbook Problem
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Tom Young, vice president of Dunn Company (a producer of plastic products), has been supervising the implementation of an activity-based cost management system. One of Tom’s objectives is to improve process efficiency by improving the activities that define the processes. To illustrate the potential of the new system to the president, Tom has decided to focus on two processes: production and customer service.

Within each process, one activity will be selected for improvement: molding for production and sustaining engineering for customer service. (Sustaining engineers are responsible for redesigning products based on customer needs and feedback.) Value-added standards are identified for each activity. For molding, the value-added standard calls for nine pounds per mold. (Although the products differ in shape and function, their size, as measured by weight, is uniform.) The value-added standard is based on the elimination of all waste due to defective molds (materials is by far the major cost for the molding activity). The standard price for molding is $15 per pound. For sustaining engineering, the standard is 60 percent of current practical activity capacity. This standard is based on the fact that about 40 percent of the complaints have to do with design features that could have been avoided or anticipated by the company.

Current practical capacity (the first year) is defined by the following requirements: 18,000 engineering hours for each product group that has been on the market or in development for five years or less, and 7,200 hours per product group of more than five years. Four product groups have less than five years’ experience, and 10 product groups have more. There are 72 engineers, each paid a salary of $70,000. Each engineer can provide 2,000 hours of service per year. There are no other significant costs for the engineering activity.

For the first year, actual pounds used for molding were 25 percent above the level called for by the value-added standard; engineering usage was 138,000 hours. There were 240,000 units of output produced. Tom and the operational managers have selected some improvement measures that promise to reduce non-value-added activity usage by 30 percent in the second year. Selected actual results achieved for the second year are as follows:

Chapter 12, Problem 27P, Tom Young, vice president of Dunn Company (a producer of plastic products), has been supervising the

The actual prices paid per pound and per engineering hour are identical to the standard or budgeted prices.

Required:

  1. 1. For the first year, calculate the non-value-added usage and costs for molding and sustaining engineering. Also, calculate the cost of unused capacity for the engineering activity.
  2. 2. Using the targeted reduction, establish kaizen standards for molding and engineering (for the second year).
  3. 3. Using the kaizen standards prepared in Requirement 2, compute the second-year usage variances, expressed in both physical and financial measures, for molding and engineering. (For engineering, explain why it is necessary to compare actual resource usage with the kaizen standard.) Comment on the company’s ability to achieve its targeted reductions. In particular, discuss what measures the company must take to capture any realized reductions in resource usage.

1.

To determine

Ascertain the non-value-added usage and costs for molding and sustaining engineering and also determine the cost of unused capacity for the engineering activity.

Explanation of Solution

Compute non-value-added usage and costs for the first year:

Non-value-added costs: Non-value-added costs are the costs that are incurred due to non-value-added activities or the inefficient performance of value-added activities. Due to the increased competition, many firms are trying to eliminate non-value-added activities and an insignificant portion of value-added activities, as they consume unnecessary costs and prevent performance.

Non-value-added cost = SP(AQSQ)

ParticularsAQSQNon-value-added usage (AQ-SQ)

Non-value-added cost

[SP (AQ-SQ)]

Moulding

2,700,000

(1)

2,160,000

(3)

540,000$ 8,100,000
Engineering144,000 (2)

86,400

(4)

57,600$ 2,016,000
    $ 10,116,000

Table (1)

Working notes:

(1)

Actual quantity used (AQ)=(Actual pounds used for moulding ×Value-added standard calls ×Units produced)=(1.25[25% above the level called for by the value added standard]×9pounds per molds×240,000 units)=2,700,000units

(2)

AQ for engineering=[(Number of product groups×current practical capacity{5years or less})+(Number of product groups×current practical capacity{more than 5years})]=[(4×18,000engineering hours)+(10×7,200

2.

To determine

Determine the kaizen standards for molding and engineering for the second year.

3.

To determine

Ascertain the second year usage variances, expressed in both financial and physical measures, for molding and engineering and comment on the company’s ability to achieve its targeted reductions. Determine the measures that company must take to capture any realized reductions in resource usage.

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Chapter 12 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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