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Gordon Company produces custom-made machine parts. A setup activity is required for the batches of parts that it produces. Activity output is measured using setup hours. The value-added standard ( SQ ) for this activity is zero. On July 1, at the beginning of the fiscal year, 10 setup hours were allowed and used per batch. The standard wage rate for setup labor is $20 per setup hour. During the first quarter of the new fiscal year, the company is planning to implement a new setup method developed by Gordon’s industrial engineers that is expected to reduce setup time by 40 percent. The new procedure was implemented during the first quarter and the improvement expected was realized. Required: 1. What is the setup standard for setup hours and the associated expected cost at the beginning of the first quarter? The kaizen standard and expected associated cost? 2. What is the setup standard for setup hours and the associated cost at the end of the first quarter? Explain. What is the next step in the kaizen cost reduction process? 3. What if the new procedure implemented in the first quarter only produced a 30 percent reduction in setup time instead of the expected 40 percent reduction? What would the new maintenance standard and cost be? What criteria would you logically expect to be met before maintenance standards and costs are modified?

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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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Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 12, Problem 3CE
Textbook Problem
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Gordon Company produces custom-made machine parts. A setup activity is required for the batches of parts that it produces. Activity output is measured using setup hours. The value-added standard (SQ) for this activity is zero. On July 1, at the beginning of the fiscal year, 10 setup hours were allowed and used per batch. The standard wage rate for setup labor is $20 per setup hour. During the first quarter of the new fiscal year, the company is planning to implement a new setup method developed by Gordon’s industrial engineers that is expected to reduce setup time by 40 percent. The new procedure was implemented during the first quarter and the improvement expected was realized.

Required:

  1. 1. What is the setup standard for setup hours and the associated expected cost at the beginning of the first quarter? The kaizen standard and expected associated cost?
  2. 2. What is the setup standard for setup hours and the associated cost at the end of the first quarter? Explain. What is the next step in the kaizen cost reduction process?
  3. 3. What if the new procedure implemented in the first quarter only produced a 30 percent reduction in setup time instead of the expected 40 percent reduction? What would the new maintenance standard and cost be? What criteria would you logically expect to be met before maintenance standards and costs are modified?

1.

To determine

Identify the setup standard for setup hours and the associated expected cost at the beginning of the first quarter and determine the kaizen standard and expected associated cost for Company G.

Explanation of Solution

Kaizen costing: Kaizen costing is the costing strategy concerned with decreasing costs by identifying small, continuous improvements for existing products and processes. The main operational strategy is to reduce non-value-added costs. The kaizen subcycle is defined by a Plan-Do-Check-Act sequence and a kaizen standard exhibits the planned improvement for the upcoming period. The cost reduction controlling process is achieved through the repetitive use of two major subcycles:

1.    The kaizen or continuous improvement cycle

2.    The maintenance cycle

Calculate the kaizen standard and expected associated cost:

Setup standard = 10 hours per batch

Expected cost per batch=Setup standard ×standard wage rate for setup labor=10 hours per batch×$20 per setup hour=$200

Due to the implementation of a new set up method the setup time is reduced by 40 percent

2.

To determine

Determine the setup standard for setup hours and the associated cost at the end of the first quarter and ascertain the next step in the kaizen cost reduction process.

3.

To determine

Explain the implication if the new procedure implemented in the first quarter only produced a 30 percent reduction in set up time instead of the expected 40 percent reduction and determine the new maintenance standard and cost. Ascertain the criteria that would logically expect to be met before maintenance standards and costs are modified.    

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Chapter 12 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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