Professional Documents
Culture Documents
2. A
functional-based
responsibility
accounting system is characterized
by four elements: (1) a responsibility
center, where responsi- bility is
assigned to an individual in charge
(responsibility is usually defined in
financial terms); (2) the setting of
budgets and stan- dards to serve as
benchmarks
for
performance
measurement; (3) measurement of
performance by comparing actual
outcomes with budgeted outcomes;
and (4) individuals being rewarded or
penalized according to management
policies.
3.
In an activity-based responsibility
accounting system, the focus of control
shifts from re- sponsibility centers to
processes and teams. Management is
concerned with how work is done, not
with where it is done. Process improvement and process innovation are
em- phasized. Standards tend to be
optimal, dy- namic, and process
5.
6.
109
8.
9.
(1)
Activity
elimination the
identification
and
elimination
of
activities that fail to add value. (2)
Activity selection the process of
choosing among different sets of
activities
caused
by
competing
strategies. (3) Activity reduction the
process of decreasing the time and
resources required by an activity. (4)
Activity sharing increasing the
efficien- cy of necessary
activities
using economies of scale.
10.
12.
13.
14.
15.
16.
EXERCISES
51
1. Plantwide rate = ($1,200,000 + $1,800,000+ $600,000)/60,000 = $60 per
Machine hour
Unit overhead cost = $60 50,000/100,000 = $30
Activity rates:
Machine rate = $1,800,000/60,000 = $30 per machine hour
Testing rate = $1,200,000/40,000 = $30 per testing hour
Rework rate = $600,000/20,000 = $30 per rework hour
Total overhead cost = ($30 50,000) + ($30
= $2,250,000
52
Classification:
Situation
1
2
3
4
5
6
7
Activity-Based
A
A
A
B
B
B
A
FunctionalBased B
B
B
A
A
A
B
Comments:
Situation 1: In a functional-based system, individuals are held responsible for the
efficiency of organizational units, such as the Grinding Department. In an activitybased system, processes are the control points because they are the units of
change; they represent the way things are done in an organization. Improvement
and innovation mean changing the way things are done, or in other words, changing processes. Since processes, such as procurement, cut across functional
boundaries, teams are the natural outcome of process management. It is only
natural that the managers of purchasing, receiving, and accounts payable be part of
a team looking for ways to improve procurement.
Situation 2: In a functional-based responsibility system, individuals in charge of
responsibility centers are rewarded based on their ability to achieve the financial
goals of the responsibility center. Thus, meeting budget promises the fat bo- nus.
In a continuous improvement environment, process improvement is depen- dent on
team performance, so rewards tend to be group based, and gainsharing is often
used. Furthermore, there are many facets to process performance other than cost,
so the performance measures tend to be multidimensional (e.g., quality and
delivery time).
52
Concluded
Situation 3: In a functional-based system, efforts are made to encourage individuals to maximize the performance of the subunit over which they have responsibility. The concern of activity-based responsibility accounting is overall organizational performance. The focus is systemwide. It recognizes that maximizing
individual performance may not produce firmwide efficiency.
Situation 4: In a functional-based system, performance of subunits is usually
financial-based and is measured by comparing actual with budgeted outcomes. In
an activity-based system, process performance is emphasized. The objective is to
provide low-cost, high-quality products, delivered on a timely basis. Thus, both
financial and nonfinancial measures are needed.
Situation 5: In a functional-based system, budgets and standards are used to
control costs. In an activity-based responsibility system, the focus is on activities
because activities are the cause of costs. Driver analysis and activity analysis are
fundamental to the control process. Driver analysis recognizes that controlling
costs requires managers to understand the root causes. Activity analysis is the
effort expended to identify, classify, and assess the value content of all activities.
Once the value content is known, then costs can be controlled through such
means as activity reduction, activity elimination, activity sharing, and activity selection.
Situation 6: A functional-based system uses currently attainable standards that
allow for a certain amount of inefficiency. Achieving the standard is the empha- sis,
and there is no effort to improve on the standards themselves. An activity- based
approach strives for the ideal, and so the standard is the ideal. Progress is
measured over time with the expectation that performance should be continually
improving. Efforts are made to find new ways of doing things and, thus, to find new
optimal standards. The objective is to always provide incentives for positive
changes.
Situation 7: The functional-based system tends to ignore a firms activities and the
linkages of those activities with suppliers and customers. It is internally fo- cused.
An activity-based system builds in explicit recognition of those linkages and
emphasizes the importance of the value chain. Furthermore, the assessment of the
value content of activities is explicitly related to customers. What goes on outside
the firm cannot be ignored.
53
The ABM implementation is taking too long and is not producing the expected results. It also appears to not be integrated with the divisions official accounting
system, thus encouraging managers to continue relying on the old system (as
evidenced by the continued reliance on traditional materials and labor efficiency
variances). The fact that the ABC product costs are not significantly different in
many cases could be due to a lack of product diversity or perhaps due to poor
choices of pools and drivers. The lack of a competitive cost state suggests the
presence of significant nonvalue-added costs. The emphasis on the absence of
product cost differences, lack of cost reductions, and the attitude about activity
detail and the value content of inspection all reveal that plant managers have a very
limited understanding about ABM and what it can do. There clearly needs to be a
major effort to train managers to understand and use activity data. At this point,
there is no organizational culture that emphasizes the need for continuous
improvement. This need and the role ABM plays in continuous improvement
needs to be taught. The new ABM system also needs to be integrated to maximize
its chances for success.
54
1. David was concerned about meeting the schedule and staying within the 5
percent variance guideline. The first weeks production exceeded the guide- line
for both materials and labor, and he expected the same outcome for the second
week. By stopping inspections, no materials waste would be ob- served
and recorded for the second week, moving the usage variance back within the 5
percent tolerance level. Accepting all units produced also will re- duce the total
labor time reported. Finally, using inspectors as production la- bor and counting
their time as inspection labor provides some free direct labor time, which
would also contribute to the reduction or elimination of an unfavorable labor
efficiency variance. Davids behavior is unethical. David (and perhaps
others) is deliberately subverting the organizations legitimate and ethical
objective of providing a high-quality product used in the manufac- ture of an
airplane in exchange for a favorable performance rating and, pre- sumably, a
good salary increase or bonus. Although no explicit information is provided, the
stress test seems to imply an important safety role for the bolts in the airplane
structure. If true, then Davids actions become even more questionable.
54
Concluded
55
The following are possible sets of questions and answers (provided as examples of
what students could suggest):
Cleaning oil:
Question:
Answer:
Question:
Answer:
Question:
Answer:
produce
bad
Question:
Answer:
Question:
Answer:
10
56
Nonvalue-added:
Comparing documents
Resolving discrepancies
(state detection)
(rework)
Value-added:
Preparing checks
Mailing checks
57
Questions 26 represent a possible sequence for the activity of comparing documents, and Questions 1 and 36 represent a possible sequence for resolving
discrepancies. The two activities have a common root cause.
Question 1: Why are we resolving discrepancies?
Answer:
Because the purchase order, receiving order, and invoice have been
compared and found to be in disagreement.
Question 2: Why are documents being compared?
Answer:
Because they may not agree.
Question 3: Why would the documents not agree?
Answer:
Because one or more may be wrong.
Question 4: Why would a document be wrong?
Answer:
Because the amount received from the supplier may not correspond to
the amount ordered or because the amount billed may not corres- pond
to the amount received or both.
Question 5: Why are the amounts different?
Answer:
Because of clerical erroreither by us or by the supplier.
Question 6: How can we avoid clerical error?
Answer:
Training for our clerks will reduce the number of discrepancies; for
suppliers, extra training and care can be suggested where there is
evidence of a problem.
11
58
1. A process is a collection of activities with a common objective. The common
objective of procurement is to supply bought and paid for materials to operations (e.g., the manufacturing process). The common objective of purchasing is
to produce a request for materials from suppliers; the common objective of
receiving is to process materials from suppliers and move them to the operations area (e.g., stores or manufacturing); the common objective of paying bills
is to pay for the materials received from suppliers.
2. The effect is to reduce the demand for the activity of resolving discrepancies by
30 percent. By so doing, Whitley will save 21 percent (0.30 0.70) of its clerical
time. Thus, about four clerks can be eliminated (21% * 20 clerks = 4 clerks
eliminated) by reassigning them to other areas or simply laying them off. This
will produce savings of about $120,000 per year (4 clerks * $30,000 salary). This
is an example of process improvementan incremental increase in process
efficiency resulting in a cost reduction.
59
EDI eliminates the demand for virtually all the activities within the bill-paying
process. Some demand may be left for payment activities relative to the acquisi- tion
of nonproductive supplies. Assuming conservatively that 90 percent of the demand
is gone, then there would be a need for perhaps two clerks (10% * 20 clerks = 2
remaining clerks). This would save the company $540,000 (18 clerks *
$30,000 salary) per year for this subprocess alone. Additional savings would be
realized from reduction of demands for purchasing and receiving activities.
Switching to an EDI procurement structure is an example of process innovation.
12
510
Case
Nonvalue-Added Cost
A
B
C
D
E
F
$9 per unit
2
$300 per setup
3
$120 per unit
4
$400,000 per 5year
$250 per unit
6
$900,000 per year
Root Cause
Cost Reduction
Process design
Product design
Plant layout
Multiple*
Suppliers
Product design
Activity selection
Activity reduction
Activity
Activity selection
Activity
Activity sharing
2(0.5)$12
(0.25)$8 + (8 7.5)$10
(8
2)$50
3
4(6 0)$20
5$320,000 + (16,000)$5
6(6.5 6)$500
As given
*For example, process design, product design, and quality approach or philosophy.
511
Fixed activity rate = SP = $252,000/28,800 = $8.75 per order
Cost of unused capacity:
SP SQ
SP
$8.75 14,400
$8.75AQ
28,800
$126,000 U
Activity Volume Variance
$10,500 F
SP AU
$8.75
27,600
13
511
Concluded
Note: For fixed activity costs, the practical capacity is currently 28,800
orders;
thus, 14,400 orders are unnecessary.
A value-added cost report would be as follows:
Purchasing
Value-Added
Costs
$126,000
Nonvalue-Added
Costs
$126,000
Actual
Costs
$252,000
14
512
1.
Willson Company
Value- and Nonvalue-Added Cost Report
For the Year Ended December 31, 2005
Value-Added
Actual
Costs
$
630,000
2,394,0
00
2,838,0
00
1,125,00
$6,987,0
00
2. Inspecting parts is nonvalue-added (SQ = 0 is a necessary condition for a
nonvalue-added activity). Inspection is nonvalue-added because it is a statedetection activity, not a state-changing activity. It also is not essential to ena- ble
other activities to be performed. Value-added activities can engender nonvalueadded costs if they are not performed efficiently.
Purchasing parts
Assembling parts
Administering parts
Inspecting parts
Total
Costs
$ 450,000
2,160,000
1,980,000
0
$4,590,000
Nonvalue-Added
Costs
$ 180,000
234,000
858,000
1,125,000
$2,397,000
513
1.
Willson Company
Nonvalue-Added Cost Trend Report
For the Year Ended December 31, 2006
Change
$ 90,000
F162,000
F
198,000
F
450,000
F
$900,000
F
Note: The above amounts were computed for each year, using the following
formula: (AQ SQ)SP.
Purchasing parts
Assembling parts
Administering parts
Inspecting parts
Total
2005
$ 180,000
234,000
858,000
1,125,000
$2,397,000
2006
90,000
72,000
660,000
675,000
$1,497,000
$
2. A trend report allows managers to assess the effectiveness of activity management. It is a critical document that reveals the success of continuous
improvement efforts. It also provides some information about additional opportunity for improvement. In 2006, activity management reduced the
nonvalue-added costs by $900,000, signaling that the actions taken were
good. It also shows that additional opportunity for reduction exists more effort is needed to reduce the $1,497,000 of remaining nonvalue-added costs.
15
514
1. Activity and driver analysis:
Setting up equipment: This is a value-added activity because (1) it causes a
change in the state of nature: improperly configured equipment to properly
configured equipment, (2) there is no prior activity that could have caused the
state change, and (3) it is necessary to enable other activities to be performed. However, setting up equipment often takes more time than needed and
so this activity has a nonvalue-added component. Most companies strive for
zero setup time. Thus, the time and associated cost are nonvalue-added
because the activity is performed inefficiently. Means should be explored to
reduce the time of this activity so that it consumes fewer resources. Possible
root causes include such factors as product design, process design, and
equipment design. Knowing the root causes can lead to an improvement in
activity efficiency. Moving from a departmental manufacturing structure to a
cellular manufacturing structure in some cases may eliminate the need for setups, thus eliminating the activity, or flexible manufacturing equipment might be
purchased that provides an almost instantaneous setup capability (a
change in process technology and certainly a change in equipment design).
In other cases, the activity may be improved by redesigning the product so that
a less complicated setup is required.
Creating scrap: This is generally viewed as a nonvalue-added activity and
should be eliminated. It is nonvalue-added because it causes a nondesired
change of state and because it does not enable other value-added activities to
be performed. Efforts should be made to find ways of producing that elimi- nate
scrap. Possible root causes include poor vendor quality, quality man- agement
approach, and manufacturing process used. Knowing the root caus- es may
lead to a supplier valuation program that improves the quality of the parts and
materials purchased externally, adoption of a total quality manage- ment
program, and perhaps the use of automated equipment to cut down on material
waste (because of greater precision).
Welding subassemblies: This is a value-added activity. It causes a desired state
change that could not have been done by preceding activities and enables
other activities to be performed. If inefficient, then means should be sought to
improve efficiency. The goal is to optimize value-added activity per- formance.
Possible root causes include product design, process design, and production
technology. Changing either of the two designs could decrease the demand for
the welding activity while producing the same or more output. A change in
technology buying more advanced technology, for example may also
increase the efficiency of the activity.
16
514
Continued
17
514
Concluded
Creating scrap: Using the number of defective units as a driver should encourage managers to reduce defective units. Assuming that defective units are
the source of scrap, this should reduce scrap costs. Similarly, using
pounds of scrap should encourage managers to find ways to reduce scrap. In
both cases, the behavioral consequences could be two-edged. If the reduc- tion
of scrap (defective units) is achieved by increasing quality/productive efficiency, the effect is compatible with the objective of creating a competitive
advantage. If the reduction is achieved by allowing defective units to flow
through to finished goods, then the effect will be to alienate customers, not win
their favor (customer realization decreases). Neither driver appears to dominate.
One solution is to report the trend in warranty activity with the trend in scrap
activity. This may discourage any kind of pass-on behavior.
Welding subassemblies: Using welding hours should encourage management to
find ways of reducing the welding hours required per product. This would be
more likely to induce managers to look at possible root causes such as product
design and process design rather than number of welded subassem- blies.
There is some value in looking for ways to reduce the number of welded
subassemblies, perhaps redesigning the product to eliminate welding.
Materials handling: Both drivers seem to have positive incentives. Seeking ways
to reduce the number of moves or distance moved should lead manag- ers to
look at root causes. Reorganizing the plant layout, for example, should reduce
either the number of moves or the distance moved. Hopefully, the ac- tivity
drivers will lead to the identification of executional drivers that can be managed
so that the activity can be reduced and eventually eliminated.
Inspecting parts: Hours of inspection can be reduced by working with suppliers so that greater incoming quality is ensured. Similarly, the number of defective parts can be reduced by working with suppliers so that incoming quality is increased. Hours of inspection, however, can be reduced without
increasing quality. This is not true for the number of defective parts. Using the
number of defective parts appears to be a better choice.
18
515
1. First quarter: Setup time standard = 10 hours (based on the planned improvement: 15 hours 5 hours)
Second quarter: Setup time standard = 8 hours (based on the planned improvement: 9 hours 1 hour)
2. Kaizen subcycle:
Plan (five-hour reduction from process redesign)
Do (try out setup with new design)
Check (time required was nine hours, a six-hour reduction)
Act (lock in six-hour improvement by setting new standard of nine hours and
using same procedures as used to give the nine-hour outcome; and,
simultaneously, search for new improvement opportunity; in this case, the
suggested changes of the production workers.)
Repeat kaizen subcycle:
Plan (one-hour reduction from setup procedure changes)
Do (train and then implement procedures)
Check (actual time required was 6.5 hours, a 2.5-hour reduction)
Act (lock in improvement by setting standard of 6.5 hours and begin search
for new improvement)
3. Maintenance subcycle:
First quarter (end of):
Establish standard (nine hours based on improved process design)
Do (implement repetitively the improved standard)
Check (see if the nine-hour time is maintained)
Act (if the nine-hour time deteriorates, find out why and take corrective action to restore to seven hours.)
Second quarter: Same cycle using 6.5 hours as the new standard to maintain
Note: The maintenance cycle described begins after observing the actual improvement. The actual improvement is locked in. The maintenance standard at
the beginning of the first quarter is 15 hours.
19
515
Concluded
516
1.
JIT
Non-JIT
a
Sales
$25,000,000
$25,000,00
b
1,500,000
1,500,00
Allocation
0
a
$125 200,000, where $125 = $100 cost + ($100 0.25) markup on cost, and
200,000 is the average order size times the number of orders
20
516
Concluded
JIT
Ordering costs:
$4,000 400
$4,000 40
$ 1,600,000
$ 160,000
Selling costs:
$8,000 40
$8,000 40
320,000
Service costs:
$2,000 200
$2,000 100
400,000
Total
Non-JIT
320,000
200,000
$ 2,320,000
$ 680,000
21
517
1. Supplier cost:
First, calculate the activity rates for assigning costs to suppliers:
Inspecting components: $240,000/2,000 = $120 per sampling
hour Reworking products: $760,500/1,500 = $507 per rework
hour Warranty work: $4,800,000/8,000 = $600 per warranty hour
Next, calculate the cost per component by supplier:
Supplier cost:
Vance
Purchase cost:
$23.50 400,000
9,400,000
$21.50
$34,400,000
Warranty work:
$600
240,000
$600
4,560,000
Total supplier cost
$39,910,070
Units supplied
Unit cost
24.94*
1,600,000
Inspecting components:
$120
4,800
$120
235,200
Reworking products:
$507
45,630
$507
714,870
Foy
40
1,960
90
1,410
400
7,600
$ 9,690,430
400,000
$
1,600,000
24.23*
$
*Rounded
The difference is in favor of Vance; however, when the price concession is
considered, the cost of Vance is $23.23, which is less than Foys component.
Lumus should accept the contractual offer made by Vance.
517
Concluded
2. Warranty hours would act as the best driver of the three choices. Using this
driver, the rate is $1,000,000/8,000 = $125 per warranty hour. The cost assigned to each component would be:
Vance
Lost sales:
$125 400
$125 7,600
Units supplied
Increase in unit cost
*Rounded
Foy
$ 50,000
$ 50,000
400,000
$
0.13*
$ 950,000
$ 950,000
1,600,000
$
0.59*
PROBLEMS
518
1. An activity driver measures the amount of an activity consumed by a cost
ob- ject. It is a measure of activity output. Activity drivers are used to assign
ac- tivity costs to cost objects. On the other hand, a cost driver is the root
cause of the activity and explains why the activity is performed. Cost drivers
are useful for identifying how costs can be reduced (rather than assigned).
2. Value content and driver analysis:
Setting up equipment: At first glance, this appears to be a value-added activity because: (1) it causes a change in the state of nature: improperly configured equipment to properly configured equipment, (2) there is no prior
activ- ity that should have caused the state change, and (3) it is necessary to
enable other activities to be performed. However, setting up equipment often
takes more time than needed and so has a nonvalue-added component. Most
com- panies strive for zero setup time, suggesting that the time and
associated cost are nonvalue-added because the activity is performed
inefficiently. (A ze- ro setup time suggests a nonvalue-added activity.) Means
should be explored to reduce the time of this activity so that it consumes
fewer resources. Possi- ble root causes include such factors as product
design, process design, and equipment design. Knowing the root causes can
lead to an improvement in activity efficiency. Moving from a departmental
manufacturing structure to a cellular manufacturing structure in some cases
may eliminate the need for se- tups, thus eliminating the activity. Or flexible
manufacturing equipment might be purchased that provides an almost
instantaneous setup capability (a change in process technology and
certainly a change in equipment design). In other cases, the activity may be
improved by redesigning the product so that a less complicated setup is
required.
Performing warranty work: This is generally viewed as a nonvalue-added activity and should be eliminated. It is nonvalue-added because it represents a
type of reworkrepairs on products that are caused by faulty production.
Possible root causes include poor vendor quality, poor product design,
quali- ty management approach, and manufacturing process used.
Knowing the root causes may lead to a supplier valuation program that
improves the quali- ty of the parts and materials purchased externally,
adoption of a total quality management program, product redesign, process
redesign, and perhaps the use of automated equipment to cut down on faulty
products.
24
518
Continued
25
518
Concluded
3. Behavioral analysis:
Setting up equipment: Using the number of setups as a driver may cause a
buildup of inventories. Since reducing the number of setups will reduce
setup costs, there will be an incentive to have fewer setups. Reducing the
number of setups will result in larger lots and could create finished goods
inventory. This is in opposition to the goal of zero inventories. On the other
hand, if se- tup time is used as the driver, managers will have an incentive to
reduce se- tup time. Reducing setup time allows managers to produce on
demand rather than for inventory.
Performing warranty work: Using the number of defective units as a driver
should encourage managers to reduce defective units. Assuming that defective units are the source of warranty work, this should reduce warranty
costs. Similarly, using warranty hours could encourage managers to find
ways to reduce warranty work by decreasing its causes. Alternatively, it may
cause them to look for more efficient means of performing warranty work.
Increas- ing the efficiency of a nonvalue-added activity has some short-run
merit but it should not be the focus. Of the two drivers, defective units is the
most com- patible with eventual elimination of the nonvalue-added activity.
Welding subassemblies: Using welding hours should encourage
management to find ways of reducing the welding hours required per
product. This would more likely induce managers to look at possible root
causes such as product design and process design than would number of
welded subassemblies. There is some value in looking for ways to reduce
the number of welded sub- assemblies, perhaps redesigning the product to
eliminate welding.
Moving materials: Both drivers seem to have positive incentives.
Seeking ways to reduce the number of moves or distance moved should lead
manag- ers to look at root causes. Reorganizing the plant layout, for
example, should reduce either the number of moves or the distance moved.
Hopefully, the ac- tivity drivers will lead to the identification of executional
drivers that can be managed so that the activity can be reduced and
eventually eliminated.
Inspecting components: Hours of inspection can be reduced by working with
suppliers so that greater incoming quality is ensured. Similarly, the number
of defective parts can be reduced by working with suppliers so that incoming
quality is increased. Hours of inspection, however, can be reduced without
increasing quality. This is not true for the number of defective parts. Using
the number of defective parts appears to be a better choice.
26
519
1. Activity-based management is a systemwide, integrated approach that
focus- es managements attention on activities. It involves two dimensions:
a cost dimension and a process dimension. A key element in activity
management is identifying activities, assessing their value, and retaining
only value-adding activities. The consultant identified the activities but did
not formally classify the activities as value-added or nonvalue-added. Nor
did the consultant offer any suggestions for increasing efficiency at least
not formally. The consul- tant apparently had tentatively identified savings
possible by eliminating nonvalue-added activities. Management must still
decide how to reduce, elim- inate, share, and select activities to achieve cost
reductions.
2.
Setup
Materials handling
Inspection
Customer complaints
Warranties
Storing
Expediting
Total
Units produced and sold
$125,0
00
180,0
00
122,0
00
100,0
00
170,0
00
80,0
00
75,000
$852,0
00
120,000*
7.10
27
4. Current:
Sales
Costs
Income
$12 price:
Sales
Costs
Income
28
520
1. Nonvalue-added usage and costs, 2008:
Nonvalue-AddedNonvalue-Added
Usage
Cost
(AQ SQ)SP
$
600,000
$1,204,8
00
*1.25 6 80,000; (4 6,000) + (10 2,400) (AQ for engineering represents
the actual practical capacity acquired.)
Materials
Engineering
AQ*
600,000
48,000
SQ**
480,000
27,840
AQ SQ
120,000
20,160
SP
AU
$30 48,000
$30
46,000
$60,0
00 F
Unused Capacity
Variance
29
520
3.
Concluded
AQ*
584,800
35,400
SQ
552,000
39,936
AQ
SQ
32,80
(4,536)
SP(AQ
SQ)
Materials
$164,000
Engineering
136,080
F
*For engineering, the kaizen standard is a measure of how much resource
usage is needed (this year), and so progress is measured by comparing SQ
with actual usage, AU, not AQ, activity availability. The formula AQ AU, on the
other hand, will measure the unused capacity, a useful number, as is discussed below.
The company failed to meet the materials kaizen standard but beat the engineering standard. The engineering outcome is of particular interest. The ac- tual
usage of the engineering resource is 35,400 hours, and activity availa- bility is
48,000. Thus, the company has created 12,600 hours of unused engineering
capacity. Each engineer brings a capacity of 2,000 hours. Since engineers come
in whole units, the company now has six too many! Thus, to realize the savings
for the engineering activity, the company must decide how to best use these
available resources. One possibility is to simply lay off six engineers, thereby
increasing total profits by the salaries saved ($360,000). Other possibilities
include reassignment to activities that have insufficient re- sources (assuming
they could use engineers, e.g., perhaps new product de- velopment could use
six engineers). The critical point is that resource usage reductions must be
converted into reductions in resource spending, or the ef- forts have been in
vain.
30
521
1.
Nonvalue-added costs:
Materials (400,000 380,000)$21
Labor (96,000 91,200)$12.50
Setups (6,400 0)$75
Materials handling (16,000 0)$70
Warranties (16,000 0)$100
Total
Units produced and sold
Unit nonvalue-added cost
$
60,0
00
480,0
00
1,120,0
00
1,600,000
$
3,680,000
31
522
1. First quarter:
Setup time standard = 8 hours (based on the planned improvement: 12 hours 4 hours of reduced time)
Second quarter: Setup time standard = 4 hours (based on the planned improvement: 9 hours 5 hours)
2. Kaizen subcycle:
3. Maintenance subcycle:
First quarter:
Second quarter: Same cycle using 3 hours as the new standard to maintain.
Note: The maintenance cycle begins after observing the actual improvement.
The actual improvement is locked in.
32
522
Concluded
523
1. Cost per account = $4,070,000/50,000 = $81.40
Average fee per month = $81.40/12 = $6.78*
*Rounded
2. Activity rates:
Opening and closing accounts: $200,000/20,000 = $10 per account
Issuing monthly statements: $300,000/600,000 = $0.50 per statement
Processing transactions: $2,050,000/20,500,000 = $0.10 per transaction
Customer inquiries: $400,000/2,000,000 = $0.20 per minute
Providing ATM services: $1,120,000/1,600,000 = $0.70 per transaction
33
523 Continued
3. Costs assigned:
Opening and closing:
$10 15,000
$10 3,000
$10 2,000
Issuing monthly statements:
$0.50 450,000
$0.50 100,000
$0.50 50,000
Processing transactions:
$0.10 18,000,000
$0.10 2,000,000
$0.10 500,000
Customer inquiries:
$0.20 1,000,000
$0.20 600,000
$0.20 400,000
Providing ATM services:
$0.70 1,350,000
$0.70 200,000
$0.70 50,000
Total cost
Number of accounts
Cost per account
Low
Medium
$ 150,000
$ 30,000
$ 20,000
225,000
50,000
25,0
00
1,800,000
200,000
50,0
00
200,000
120,000
80,0
00
945,000
140,000
$ 3,320,000
38,000
$
87.37
$540,000
8,000
$ 67.50
34
High
35,000
$210,0
00
4,000
523
Concluded
4. First, calculate the profits from loans, credit cards, and other products by
customer category (using ABC data). Next, compare 50 percent of the
cross sales profits from low-balance customers with the total loss from the
low- balance checking accounts. If the cross sales profits are greater than
the loss, the presidents argument has merit.
524
1. GAAP mandates that all nonmanufacturing costs be expensed during the
pe- riod in which they are incurred. GAAP are the most likely cause of the
prac- tice. The limitations of GAAP-produced information for cost
management should be emphasized.
2. The total product consists of all benefits, both tangible and intangible, that
a customer receives. One of the benefits is the order-filling service
provided by Sorensen. Thus, it can be argued that these costs should be
product costs and not assigning them to products undercosts all
products. From the infor- mation given, there are more small orders than
large (50,000 orders averaging
600 units per order); thus, these small orders consume more of the orderfilling resources. They should, therefore, receive more of the orderfilling costs.
The average order-filling cost per unit produced is computed as
follows:
1
= $4,500,000/100,000
= $45 per
order
The per-unit ordering cost for each product family can now be
calculated: Category I: $45/600 = $0.075 per unit
Category II: $45/1,000 = $0.045 per unit
Category III: $45/1,500 = $0.03 per unit
Category I, which has the smallest batches, is the most undercosted of
the three categories. Furthermore, the unit ordering cost is quite high
relative to
5-24
Concluded
$50,000 27 = $1,350,000
$20 55,000 = 1,100,000
$2,450,000
525
1. Supplier cost:
First, calculate the activity rates for assigning costs to suppliers:
Replacing engines:
$3,200,000/4,00 = $800 per engine
0 $4,000,000/40 = $10,000 per late
Expediting orders:
0
shipment
Repairing engines:
$7,200,000/5,00
=
$1,440 per engine
0
Next, calculate the cost per engine by supplier:
Supplier cost:
Purchase
cost:
$900
$64,800,000
$1,000
$16,000,000
Replacing
engines:
$800
3,168,000
$800
32,000
Watson
Johnson
72,000
16,000
3,960
Expediting
orders:
$10,000
3,960,000
$10,000
40,000
Repairing
engines:
$1,440
7,027,200
$1,440
172,800
Total supplier cost
$16,244,800
Units supplied
16,000
Unit cost
1,015.30
40
396
4,880
120
$78,955,200
72,000
1,096.60
The Johnson engine costs less when the full supplier effects are
considered. This is a better assessment of cost because it considers
the costs that are caused by the supplier due to poor quality, poor
reliability, and poor delivery performance.
2. In the short run, buy 40,000 from Johnson and 48,000 from Watson. In
the long run, one possibility is to encourage Johnson to expand its
capacity; another possibility is to encourage Watson to increase its
quality and main- tain purchases from both sources.
RESEARCH ASSIGNMENT
527
Answers will vary.