Concept explainers
Production run size and activity improvement
Littlejohn, Inc., manufactures machined parts for the automotive industry. The activity cost associated with Part XX-10 is as follows:
Each unit requires 30 minutes of fabrication direct labor. Moreover, Part XX-10 is manufactured in production run sizes of 50 units. Each production run is set up, scheduled (production control), and moved as a batch of 50 units. Management is considering improvements in the setup, production control, and moving activities in order to cut the production run sizes by half. As a result, the number of setups, production runs, and moves will double from 10 to 20. Such improvements are expected to speed the company’s ability to respond to customer orders.
- Setup is reengineered so that it takes 60% of the original cost per setup.
- Production control software will allow production control effort and cost per production run to decline by 60%.
- Moving distance was reduced by 40%, thus reducing the cost per move by the same amount.
- A. Determine the revised activity cost per unit under the proposed changes.
- B. Did these improvements reduce the activity cost per unit?
- C. What cost per unit for setup would be required for the solution in (a) to equal the base solution?
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Chapter 18 Solutions
Financial And Managerial Accounting
- Assume that at the beginning of 20x2, Cicleta trained the 2 assembly workers in a new approach that had the objective of increasing the efficiency of the assembly process. Cicleta also began moving toward a JIT purchasing and manufacturing system. When JIT is fully implemented, the demand for expediting is expected to be virtually eliminated. It is expected to take two to three years for full implementation. Assume that receiving cost is a step-fixed cost with steps of 1,500 orders. The other three activities employ resources that are acquired as used and needed. At the end of 20x2, the following results were reported for the four activities: Required: 1. Prepare a trend report that shows the non-value-added costs for each activity for 20x1 and 20x2 and the change in costs for the two periods. Discuss the reports implications. 2. Explain the role of activity reduction for receiving and for expediting. What is the expected value of SQ for each activity after JIT is fully implemented? 3. What if at the end of 20x2, the selling price of a competing product is reduced by 27 per unit? Assume that the firm produces and sells 20,000 units of its product and that its product is associated only with the four activities being considered. By virtue of the waste-reduction savings, can the competitors price reduction be matched without reducing the unit profit margin of the product that prevailed at the beginning of the year? If not, how much more waste reduction is needed to achieve this outcome? In this case, what price decision would you recommend?arrow_forwardUse the following information for Exercises 5-44 through 5-46: The following six situations at Diviney Manufacturing Inc. are independent. a. A manual insertion process takes 30 minutes and 8 pounds of material to produce a product. Automating the insertion process requires 15 minutes of machine time and 7.5 pounds of material. The cost per labor hour is 12, the cost per machine hour is 8, and the cost per pound of materials is 10. b. With its original design, a gear requires 8 hours of setup time. By redesigning the gear so that the number of different grooves needed is reduced by 50%, the setup time is reduced by 75%. The cost per setup hour is 50. c. A product currently requires 6 moves. By redesigning the manufacturing layout, the number of moves can be reduced from 6 to 0. The cost per move is 20. d. Inspection time for a plant is 16,000 hours per year. The cost of inspection consists of salaries of 8 inspectors, totaling 320,000. Inspection also uses supplies costing 5 per inspection hour. The company eliminated most defective components by eliminating low-quality suppliers. The number of production errors was reduced dramatically by installing a system of statistical process control. Further quality improvements were realized by redesigning the products, making them easier to manufacture. The net effect was to achieve a close to zero-defect state and eliminate the need for any inspection activity. e. Each unit of a product requires 6 components. The average number of components is 6.5 due to component failure, requiring rework and extra components. Developing relations with the right suppliers and increasing the quality of the purchased component can reduce the average number of components to 6 components per unit. The cost per component is 500. f. A plant produces 100 different electronic products. Each product requires an average of 8 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 4 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. 5-46 Type of Activity Management Refer to the information for Diviney Manufacturing on the previous page. Required: For each situation, identify the cost reduction measure: activity elimination, activity reduction, activity sharing, or activity selection.arrow_forwardFirenza Company manufactures specialty tools to customer order. Budgeted overhead for the coming year is: Previously, Sanjay Bhatt, Firenza Companys controller, had applied overhead on the basis of machine hours. Expected machine hours for the coming year are 50,000. Sanjay has been reading about activity-based costing, and he wonders whether or not it might offer some advantages to his company. He decided that appropriate drivers for overhead activities are purchase orders for purchasing, number of setups for setup cost, engineering hours for engineering cost, and machine hours for other. Budgeted amounts for these drivers are 5,000 purchase orders, 500 setups, and 2,500 engineering hours. Sanjay has been asked to prepare bids for two jobs with the following information: The typical bid price includes a 40 percent markup over full manufacturing cost. Required: 1. Calculate a plantwide rate for Firenza Company based on machine hours. What is the bid price of each job using this rate? 2. Calculate activity rates for the four overhead activities. What is the bid price of each job using these rates? 3. Which bids are more accurate? Why?arrow_forward
- Calculate lead time Williams Optical Inc. is considering a new lean product cell. The present manufacturing approach produces a product in four separate steps. The production batch sizes are 45 units. The process time for each step is as follows: The time required to move each batch between steps is 5 minutes. In addition, the time to move raw materials to Process Step 1 is also 5 minutes, and the time to move completed units from Process Step 4 to finished goods inventory is 5 minutes. The new lean layout will allow the company to reduce the batch sizes from 45 units to 3 units. The time required to move each batch between steps and the inventory locations will be reduced to 2 minutes. The processing time in each step will stay the same. Determine the value-added, non-value-added, and total lead times, and the value-added ratio under the (A) present and (B) proposed production approaches. (Round percentages to one decimal place.)arrow_forwardUse the following information for Exercises 5-44 through 5-46: The following six situations at Diviney Manufacturing Inc. are independent. a. A manual insertion process takes 30 minutes and 8 pounds of material to produce a product. Automating the insertion process requires 15 minutes of machine time and 7.5 pounds of material. The cost per labor hour is 12, the cost per machine hour is 8, and the cost per pound of materials is 10. b. With its original design, a gear requires 8 hours of setup time. By redesigning the gear so that the number of different grooves needed is reduced by 50%, the setup time is reduced by 75%. The cost per setup hour is 50. c. A product currently requires 6 moves. By redesigning the manufacturing layout, the number of moves can be reduced from 6 to 0. The cost per move is 20. d. Inspection time for a plant is 16,000 hours per year. The cost of inspection consists of salaries of 8 inspectors, totaling 320,000. Inspection also uses supplies costing 5 per inspection hour. The company eliminated most defective components by eliminating low-quality suppliers. The number of production errors was reduced dramatically by installing a system of statistical process control. Further quality improvements were realized by redesigning the products, making them easier to manufacture. The net effect was to achieve a close to zero-defect state and eliminate the need for any inspection activity. e. Each unit of a product requires 6 components. The average number of components is 6.5 due to component failure, requiring rework and extra components. Developing relations with the right suppliers and increasing the quality of the purchased component can reduce the average number of components to 6 components per unit. The cost per component is 500. f. A plant produces 100 different electronic products. Each product requires an average of 8 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 4 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. 5-44 Nonvalue-Added Costs Refer to the information for Diviney Manufacturing on the previous page. Required: Estimate the nonvalue-added cost for each situation.arrow_forwardActivity-based product costing Mello Manufacturing Company is a diversified manufacturer that manufactures three products (Alpha, Beta, and Omega) in a continuous production process. Senior management has asked the controller to conduct an activity-based costing study. The controller identified the amount of factory overhead required by the critical activities of the organization as follows: The activity bases identified for each activity are as follows: The activity-base usage quantities and units produced for the three products were determined from corporate records and are as follows: Each product requires 40 minutes per unit of machine time. Instructions Determine the activity rate for each activity. Determine the total and per-unit activity cost for all three products. Round to nearest cent. Why arent the activity unit costs equal across all three products since they require the same machine time per unit?arrow_forward
- Use the following information for Exercises 5-44 through 5-46: The following six situations at Diviney Manufacturing Inc. are independent. a. A manual insertion process takes 30 minutes and 8 pounds of material to produce a product. Automating the insertion process requires 15 minutes of machine time and 7.5 pounds of material. The cost per labor hour is 12, the cost per machine hour is 8, and the cost per pound of materials is 10. b. With its original design, a gear requires 8 hours of setup time. By redesigning the gear so that the number of different grooves needed is reduced by 50%, the setup time is reduced by 75%. The cost per setup hour is 50. c. A product currently requires 6 moves. By redesigning the manufacturing layout, the number of moves can be reduced from 6 to 0. The cost per move is 20. d. Inspection time for a plant is 16,000 hours per year. The cost of inspection consists of salaries of 8 inspectors, totaling 320,000. Inspection also uses supplies costing 5 per inspection hour. The company eliminated most defective components by eliminating low-quality suppliers. The number of production errors was reduced dramatically by installing a system of statistical process control. Further quality improvements were realized by redesigning the products, making them easier to manufacture. The net effect was to achieve a close to zero-defect state and eliminate the need for any inspection activity. e. Each unit of a product requires 6 components. The average number of components is 6.5 due to component failure, requiring rework and extra components. Developing relations with the right suppliers and increasing the quality of the purchased component can reduce the average number of components to 6 components per unit. The cost per component is 500. f. A plant produces 100 different electronic products. Each product requires an average of 8 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 4 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. 5-45 Driver Analysis Refer to the information for Diviney Manufacturing on the previous page. Required: CONCEPTUAL CONNECTION For each situation, identify the possible root cause(s) of the activity cost (such as plant layout, process design, and product design).arrow_forwardAnderson Company has the following departmental manufacturing structure for one of its products: After some study, the production manager of Anderson recommended the following revised cellular manufacturing approach: Required: 1. Calculate the total time it takes to produce a batch of 20 units using Andersons traditional departmental structure. 2. Using cellular manufacturing, how much time is saved producing the same batch of 20 units? Assuming the cell operates continuously, what is the production rate? Which process controls this production rate? 3. What if the processing times of molding, welding, and assembly are all reduced to six minutes each? What is the production rate now, and how long will it take to produce a batch of 20 units?arrow_forwardJohnston Company cleans and applies powder coat paint to metal items on a job-order basis. Johnston has budgeted the following amounts for various overhead categories in the coming year. In the coming year, Johnston expects to powder coat 120,000 units. Each unit takes 1.3 direct labor hours. Johnston has found that supplies and gas (used to run the drying ovensall units pass through the drying ovens after powder coat paint is applied) tend to vary with the number of units produced. All other overhead categories are considered to be fixed. (Round all overhead rates to the nearest cent.) Required: 1. Calculate the number of direct labor hours Johnston must budget for the coming year. Calculate the variable overhead rate. Calculate the total fixed overhead for the coming year. 2. Prepare an overhead budget for Johnston for the coming year. Show the total variable overhead, total fixed overhead, and total overhead. Calculate the fixed overhead rate and the total overhead rate (rounded to the nearest cent). 3. What if Johnston had expected to make 118,000 units next year? Assume that the variable overhead per unit does not change and the total fixed overhead amounts do not change. Calculate the new budgeted direct labor hours and prepare a new overhead budget. Calculate the fixed overhead rate and the total overhead rate (rounded to the nearest cent).arrow_forward
- Production run size and activity improvement Littlejohn, Inc. manufactures machined parts for the automotive industry. The activity cost associated with Part XX-10 is as follows: Activity Activity-Base Usage Activity Rate = Activity Cost Fabrication 250 dlh 80per dlh 20,000 Setup 10 setups 80 per setup 800 Production control 10 prod, runs 30 per prod, run 300 Moving 10 moves 25 per move 250 Total activity cost per unit 21,350 Estimated units of production 500 Activity cost per unit 42.70 Each unit requires 30 minutes of fabrication direct labor. Moreover, part XX-10 is manufactured in production run sizes of 50 units. Each production run is set up, scheduled (production control), and moved as a batch of 50 units. Management is considering improvements in the setup, production control, and moving activities in order to cut the production run sizes by half. As a result, the number of setups, production runs, and mows will double from 10 to 20. Such improvements are expected to speed the companys ability to respond to customer orders. Setup is reengineered so that it takes 60% of the original cost per setup. Production control software will allow production control effort and cost per production run to decline by 60%. Moving distance was reduced by 40%, thus reducing the cost per mow by the same amount. A. Determine the revised activity cost per unit under the proposed changes. B. Did these improvements reduce the activity cost per unit? C. What cost per unit for setup would be required for the solution in (A) to equal the base solution?arrow_forwardUse the following information for Brief Exercises 11-17and 11-18: Indy Company has the following data for one of its manufacturing plants: Maximum units produced in a quarter (3-month period): 250,000 units Actual units produced in a quarter (3-month period): 200,000 units Productive hours in one quarter: 25,000 hours 11-18 (Appendix 11A) Calculating Manufacturing Cycle Efficiency Refer to the information of Indy Company above. The actual cycle time for Indy Company is 7.5 minutes, and the theoretical cycle time is 6 minutes. Required: 1. Calculate the amount of processing time and the amount of nonprocessing time. 2. Calculate the MCE. (Round to one decimal place.)arrow_forwardUse the following information for Brief Exercises 11-23 and 11-24: Theta Company has the following data for one of its manufacturing plants: Maximum units produced in a quarter (3-month period): 400,000 units Actual units produced in a quarter (3-month period): 375,000 units Productive hours in one quarter: 20,000 hours 11-24 (Appendix 11A) Calculating Manufacturing Cycle Efficiency Refer to the information for Theta Company on the previous page. The actual cycle time for Theta Company is 3.2 minutes, and the theoretical cycle time is 3 minutes. Required: 1. Calculate the amount of processing time and the amount of nonprocessing time. 2. Calculate the MCE. (Round to two decimal places.)arrow_forward
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