CHAPTER 27 (FIN MAN); CHAPTER 12 (MAN) COST MANAGEMENT … Content... · 13. The cost of a process...

1. Just-in-time processing is a philosophy that focuses on reducing time, cost, and poor quality within manufacturing processes. The result of these efforts is a reduction in inventory levels.

2. Move time and wait time in inventory are examples of non-value-added lead time.

3. A product-oriented layout can be designed to minimize materials movements and reduce (or eliminate) setup time. As a result, a product-oriented layout should have a shorter lead time than a process-oriented layout.

4. Long setup times lead to large production runs (batch sizes) in order to amortize the cost of the setup. Large batch sizes result in larger inventories, which in turn lead to long wait times. Thus, long setup times can lead directly to long lead times.

5. Pull or “make to order” manufacturing requires the manufacturer to build product only as it is needed for actual customer orders. As a result, finished goods, work in process, and materials inventories are minimized. Make to order manufacturing requires a high degree of flexibility and insignificant setup costs.

6. Product defects can cause additional costs and unpredictability in the process in the form of scrap, rework, record keeping, and inspection. In addition, product defects can cause a process to shut down, because there is very little work in process inventory to keep the next (downstream) operations running. Thus, a just-in-time manufacturer would wish to eliminate the negative consequences of product defects.

7. With supply chain management, long-term relationships are established with suppliers and customers to improve quality, cost, and delivery. Traditional relationships are usually focused on reducing price through supplier or customer competitive bidding. Thus, the traditional supplier and customer relationship can be very short-term oriented (until a better “deal” comes along).

8. A just-in-time environment will result in fewer (or no) work in process control points. As a result, there are no in-process transactions into and out of work in process inventory locations throughout the process. The just-in-time cost accounting system, termed backflush accounting, “pulls” cost from completed production, rather than “pushes” through the plant, using materials requisitions or production orders.

9. The raw and in process inventory account combines the materials and work in process inventories because the materials are often introduced directly into the process. Thus, the materials are not recorded in a separate materials account before being introduced to work in process because there is no materials inventory.

CHAPTER 27 (FIN MAN); CHAPTER 12 (MAN)COST MANAGEMENT FOR

DISCUSSION QUESTIONS

JUST-IN-TIME ENVIRONMENTS

27-1© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 27 Cost Management for Just-in-Time Environments

DISCUSSION QUESTIONS (Concluded)

10. Direct labor and indirect labor activities become combined in a just-in-time environment. Employees perform both direct and indirect labor tasks. In addition, direct labor can be a small part of the cost of producing product. As such, the direct labor is included as overall conversion cost (much like in a process cost system).

11. A Pareto chart shows the totals of a particular attribute for a number of categories. The categories are ranked and displayed left to right, so that the largest total is on the left and the smallest total is on the right. In this way, management can quickly identify important problems.

12. Non-value-added activities are activities that are viewed as unnecessary from the customer’s perspective. These activities are generally considered wasteful and are candidates for elimination through process improvements.

13. The cost of a process can be improved by improving processing methods or eliminating unnecessary or wasteful work.



PE 27–1A (FIN MAN); PE 12–1A (MAN)a. Value-added lead time………………………… 28 min. (16 min. + 12 min.)

Non-value-added lead time:Total within-batch wait time……………… 1,092 (16 min. + 12 min.) × (40 – 1)Move time…………………………………… 15

Total lead time………………………………… 1,135 min.

28 min.1,135 min.

PE 27–1B (FIN MAN); PE 12–1B (MAN)a. Value-added lead time………………………… 19 min. (11 min. + 8 min.)

Non-value-added lead time:Total within-batch wait time……………… 1,881 (11 min. + 8 min.) × (100 – 1)Move time…………………………………… 15

Total lead time………………………………… 1,915 min.

19 min.1,915 min.

PE 27–2A (FIN MAN); PE 12–2A (MAN)b. Smaller batch sizesc. Employee involvementd. Less wasted movement of material and people

PE 27–2B (FIN MAN); PE 12–2B (MAN)a. Production pace matches demandd. Receive raw materials directly to manufacturing cells

b. Value-added ratio: = 1.0%

PRACTICE EXERCISES

Value-added ratio:b. = 2.5%



PE 27–3A (FIN MAN); PE 12–3A (MAN)

a. Raw and In Process Inventory* 175,500Accounts Payable 175,500

*$270 per unit × 650 units

b. Raw and In Process Inventory* 70,560Conversion Costs 70,560

*[($819,000 ÷ 1,950 hours) × (16 min. ÷ 60 min.)]

= $112 per unit; $112 × 630 units = $70,560

c. Finished Goods Inventory* 238,750Raw and In Process Inventory 238,750

*($270 + $112) × 625 units

PE 27–3B (FIN MAN); PE 12–3B (MAN)

a. Raw and In Process Inventory* 68,250Accounts Payable 68,250

*$65 per unit × 1,050 units

b. Raw and In Process Inventory* 12,000Conversion Costs 12,000

*[($144,000 ÷ 1,800 hours) × (9 min. ÷ 60 min.)]

= $12 per unit; $12 × 1,000 units = $12,000

c. Finished Goods Inventory* 75,460Raw and In Process Inventory 75,460

*($65 + $12) × 980 units



PE 27–4A (FIN MAN); PE 12–4A (MAN)

QualityCost

Prevention………………………………………… $126,000 63% 12.6%Appraisal………………………………………… 30,000 15% 3.0%Internal failure…………………………………… 28,000 14% 2.8%External failure………………………………… 16,000 8% 1.6%Total……………………………………………… $200,000 100% 20.0%

PE 27–4B (FIN MAN); PE 12–4B (MAN)

QualityCost

Prevention………………………………………… $288,000 32% 9.6%Appraisal………………………………………… 108,000 12% 3.6%Internal failure…………………………………… 54,000 6% 1.8%External failure………………………………… 450,000 50% 15.0%Total……………………………………………… $900,000 100% 30.0%

PE 27–5A (FIN MAN); PE 12–5A (MAN)Inspection activity before improvement: $360,000 ÷ 60,000 units = $6 per unit

Inspection activity after improvement:Revised inspection cost……………………… (30% × 60,000 units) × $6 per unit = $108,000Revised inspection cost per unit…………… $108,000 ÷ 60,000 units = $1.80 per unit

PE 27–5B (FIN MAN); PE 12–5B (MAN)Inspection activity before improvement: $68,000 ÷ 16,000 units = $4.25 per unit

Inspection activity after improvement:Revised inspection cost……………………… 3,200 inspections × $4.25 per unit = $13,600Revised inspection cost per unit…………… $13,600 ÷ 16,000 units = $0.85 per unit

Quality Cost Classification Cost Sales

Sales

Total Quality Total

Cost of Quality Report

Cost of Quality ReportPercent of Percent of

Percent ofTotal

Quality Cost Classification

Percent ofTotal Quality

Cost



Ex. 27–1 (FIN MAN); Ex. 12–1 (MAN)The CEO must not have been listening very closely at the conference. Just-in-time is not primarily an inventory reduction method. Just-in-time is a process improvement philosophy that focuses on reducing time, cost, poor quality, and uncertainty from a process. Large inventories are merely a symptom of poorly designed processes. Thus, the CEO’s statement is naive. The company must first remove the reasons for inventory. These causes are poor quality, large setup times, unreliable equipment, poor employee relationships, poor layout design (process focus), and poor supplier relationships. Whenthese are improved, then the inventory level can be reduced, lead times can be shortened, and the company can begin pull manufacturing. If the employees follow the CEO’s orders without making the process improvements, the plant will likely suffer reduced productivity.

In addition, the CEO has not provided the training or action plan for moving to just-in-time. The CEO has only commanded that it be done. This will create anxiety in the workforce, and it is not consistent with employee involvement.

Ex. 27–2 (FIN MAN); Ex. 12–2 (MAN)This is an actual situation facing the U.S. apparel industry. Warren Featherbone andother U.S.-based apparel manufacturers are discovering the strategic power of just-in-time. Rather than competing with the offshore manufacturers on price, these companies are providing smaller quantities with much faster delivery. The retailer is able to order and receive goods in smaller, more frequent batch sizes. As a result, the retailer is able to move with fashion trends much more quickly. For example, if a particular style is proving popular, the domestic manufacturer can immediately produce and deliver more of this item. The offshore operation manufactures in batch sizes that are too large and too faraway to respond quickly. In addition, the retailer does not have to commit significant inventory to unknown fashion trends when purchasing from the local company. As a result, the retailer is able to avoid markdowns on slow-moving goods. Markdowns represent the second largest cost to retailing operations (next to cost of merchandise sold). The retailer must make large order commitments to the offshore manufacturer. Ifthe product eventually proves to be disappointing in the market, the retailer has no choice but to incur severe markdowns to move the excess inventory. Because of significant benefits, the retailer will be willing to pay a higher cost for manufactureditems from the domestic company. The German and Italian apparel industries arepositioning themselves in this way.

EXERCISES



Ex. 27–3 (FIN MAN); Ex. 12–3 (MAN)Piecework compensation is a characteristic of a traditional manufacturing philosophythat is inconsistent with just-in-time. Under just-in-time, workers are viewed not just aslaborers but as valuable assets of the company. The company wants workers to also bring their minds to the job. Thus, workers should be compensated for contributing to processimprovements, for training themselves to work other jobs in the cell, and for managing themselves. This might involve an hourly rate system plus bonus incentives. Piecework payments would not pay workers for these contributions because the pay arrangementis a very simple “produce for pay” arrangement. Moreover, piecework encourages workers to make product, regardless of whether there is demand for the product. Workers do not get paid for idle time, so they will continue to work and build inventory. However, under pull manufacturing, the cell will work only if there is demand. If there is no demand, the cell employees should work in other cells or work on improving themselves or theprocess. Piecework compensation is very inconsistent with this philosophy. Employees should not be penalized just because the cell is operating at a slower pace (or is shutdown) due to decreases in demand. The employee has no control over the demandplaced on the cell.

Management does not need to be concerned about proper motivation to work. Underpull manufacturing, the garment will be pulled through the cell. A slow employee will slow the whole output of the cell. The other employees will either help the slow employee or encourage the employee to catch up with the pace of the cell.

Ex. 27–4 (FIN MAN); Ex. 12–4 (MAN)Management is incorrect in stating that the direct labor time is equal to the lead time.The lead time also includes the wait time and other non-value-added time required to make the product. The different batch sizes create within-batch wait time for each unit.Thus, the lion, which is made in batch sizes of 40 units, has assembly lead time of 480minutes (40 units × 12 minutes per unit). Of this amount, only 12 minutes are value-added. The remaining 468 minutes (39 units × 12 min.) are non-value-added within-lot wait time.The bear has assembly lead time of 60 minutes (5 units × 12 minutes per unit). Of this amount, 12 minutes are value-added. The remaining 48 minutes (4 units × 12 min.) are non-value-added within-lot wait time.



Ex. 27–5 (FIN MAN); Ex. 12–5 (MAN)a. Long setup times have two negative consequences. First, a long setup time

consumes valuable machine capacity that could be used for productive purposes. Second, a long setup time results in large production batch sizes to recover the economic cost of the setup. As a result, a long setup will result in a large production batch, which increases work in process inventory, which increases lead time. Large work in process inventory commits working capital that could be used for other purposes. Long lead times reduce the company’s ability to respond to changes in customer demand.

b. One obvious improvement would be to limit the trips to the tool room to one round trip, rather than two. However, even this could be improved upon by changing the location of the fixtures. Changing the location of the fixtures could significantly reduce the lathe setup time. Instead of using a tool room to control the fixtures, the appropriate fixtures for the lathe could be located at the lathe operation. In this case, the operator would not need to walk to a tool room and retrieve and replace fixtures (along with paperwork). Rather, the operator would have the tools required for a setup right at the lathe location. In this situation, the company would trade off somewhat less control over fixtures for faster setup time. Many companies are eliminating tool rooms for just this reason. These companies are finding that tool room control is not necessary if tools are stored at a designated location near the point of use (i.e., they won’t be lost or stolen if they have a visible storage point). An intermediate solution is to retain the tool room and have the operator make only one trip to the tool room to return the old fixture and retrieve the new one.

c. Turn off machine and remove fixture from lathe………… 10 minutesClean lathe……………………………………………………… 15Install new fixture and turn on machine…………………… 10Total setup time………………………………………………… 35 minutes*

* Plus time for replacing and retrieving a tool at a point of use.



Ex. 27–6 (FIN MAN); Ex. 12–6 (MAN)

Value-Added Non-Value- TotalTime Added Time Time

Processing time………………………………… 14 14Within-batch wait time………………………… 616 616Move time………………………………………… __ 5 5

Total…………………………………………… 14 621 635

14 minutes635 minutes

1 Total process time per unit:

Milling………………………………………………… 6 minutesFinishing……………………………………………… 8

Total……………………………………………… 14 minutes2 Within-batch wait time:

Multiply the process time by the remaining units in the batch (waiting their turn)

14 minutes × (45 – 1 units) = 616 minutes


Processing time………………………………… 14 14Within-batch wait time………………………… 42 42Move time………………………………………… __ 0 0

Total…………………………………………… 14 42 56



Milling………………………………………………… 6 minutesFinishing……………………………………………… 8

Total……………………………………………… 14 minutes2 Within-batch wait time:

Multiply the process time by the remaining units in the batch (waiting their turn)14 minutes × (4 – 1 units) = 42 minutes

Traditional Philosophy

=Value-added ratio: 2.2%, rounded

Just-in-Time Philosophy

Value-added ratio: = 25.0%

1

2

1

2



Ex. 27–7 (FIN MAN); Ex. 12–7 (MAN)


Processing time……………………………… 30 30Within-batch wait time……………………… 1,170 1,170Move time……………………………………… __ 40 40

Total………………………………………… 30 1,210 1,240

30 minutes1,240 minutes


Process Step 1…………………………………… 6 minutesProcess Step 2…………………………………… 10Process Step 3…………………………………… 6Process Step 4…………………………………… 8

Total…………………………………………… 30 minutes2 Within-batch wait time:

Multiply the process time by the remaining units in the batch (waiting their turn):30 minutes × (40 – 1 units) = 1,170 minutes

3 Move time:

5 moves (from raw materials to finished goods) × 8 minutes = 40 minutes


Processing time……………………………… 30 30Within-batch wait time……………………… 120 120Move time……………………………………… __ 10 10

Total………………………………………… 30 130 160



Process Step 1…………………………………… 6 minutesProcess Step 2…………………………………… 10

Process Step 3…………………………………… 6Process Step 4…………………………………… 8

Total…………………………………………… 30 minutes2 Within-batch wait time:

Multiply the process time by the remaining units in the batch (waiting their turn)30 minutes × (5 – 1 units) = 120 minutes

3 Move time:

5 moves × 2 minutes = 10 minutes

Proposed Approach

Value-added ratio: = 18.8%, rounded

Present Approach

=Value-added ratio: 2.4%, rounded

1

2

1

2

3

3



Ex. 27–8 (FIN MAN); Ex. 12–8 (MAN)a. and b.

ElapsedTime (a)

1:00 PM Arrives at doctor office1:30 Waits in waiting room (5 × 6 min.) 30 min.1:45 Waits in examining room 151:55 Nurse takes readings 10 min.2:15 Waits in examining room 202:30 Doctor performs diagnosis 152:40 Waits to pay for services 102:45 Walks to pharmacy 53:15 Waits to fill prescription (6 × 5 min.) 303:20 Prescription is filled 53:35 Drives home 15

Total 50 min. 105 min.

Edwards arrives home at 3:35 p.m.

b. Of the total elapsed time of 155 minutes, 105 minutes is non-value-added time.

Value-Added Lead TimeTotal Lead Time

d. The doctor requires patients to wait in order to increase the productivity of the office. The patients represent the “work in process inventory” of the office, while the physician and nurses are the critical productive resources. The clinical staff remains productive because there is always a supply of patients to serve. The physician neverloses productive minutes providing patient care by waiting for a patient. Unfortunately,the physician’s productivity comes at the cost of the patient. The patients must wait for the nurse and physician before being served.

Additional causes of patient waiting are due to variation in the patient service deliveryprocess. If there are uncertainties or variation in service requirements, such as somepatients needing more time with the doctor and others needing less, then the amountof “work in process” will tend to increase in order to buffer the “throughput” of the office. Likewise, doctors being called out for emergencies causes disruption in the patient flow in the office.

(50 min. + 105 min.)50 min.

= 32%

Non-Value-Added

TimeValue-Added

Time (b)

Value-Added Ratio = c. =

Activity



Ex. 27–9 (FIN MAN); Ex. 12–9 (MAN)a. The Japanese supply chain model is one based on long-term arrangements

and partnership. The Japanese automobile manufacturers want their suppliers to be financially healthy because they rely on them for innovation. The Big Three automakers, in contrast, are only concerned about getting the best short-term price from their suppliers. The article seems to imply that the longer-term benefits from partnership are being ignored by the Big Three. As a result, they are willing to view their supplier relationships as temporary―until the next best price comes along.

b. These suppliers support the Japanese system because it provides for win-win opportunities, whereby the customer and the supplier can both be successful. The suppliers are concerned about their margins being squeezed down to the point that they will be unable to maintain financial viability and/or provide the level of supplier service that will be demanded in the long-term under the conventional Big Three supplier model. Suppliers are also concerned about the uncertainty of temporary or short-term contracts. Such demand volatility can add risk and cost to the supplier’s business over time.

c. Supply chain management is often beneficial to the customer. However, the customer may have to trade off between short-term and longer-term benefits. For example, supply chain management provides the supplier the financial incentives to invest in process and product innovation, invest in supply chain collaboration (such as EDI, RFID, and Internet collaboration), and to share best practices, such as just-in-time principles, across business entities. Such investments provide the customer access to new technologies, new ideas, more efficient processes, and ultimately lower costs and higher value for all parties involved in the supply chain.



Ex. 27–10 (FIN MAN); Ex. 12–10 (MAN)Quickie’s team approaches are very different from using a manager to hire and evaluate employees. First, the input of many individuals goes into the hiring decision. In this way, the viewpoints of a variety of people are brought into the decision. Moreover, the new hire needs to “fit” with the culture of the team. Team-based hiring can produce a higher probability of having an effective team member by having a good fit. A possible concern is the team hiring only people that are like themselves. The peer evaluation may be more effective than the supervisor evaluation, since the team may be more familiar with the team member’s input to the goals of the team. In addition, it will be difficult to hide unwanted behavior from the team. Team members work with each other every day and may best be able to evaluate performance. A concern would arise if the team members are not trained in making evaluations. The process should be helpful and not threatening to the employee.

Team-based evaluation practices increase employee involvement. Employees have input into decisions that affect the team, rather than having these decisions handed down to them. This should increase the amount of empowerment and job satisfaction enjoyed by the team members.

Ex. 27–11 (FIN MAN); Ex. 12–11 (MAN)Shield Insurance Company should adopt just-in-time principles in its claims payment operations. Management should first consider changing the layout for this process. Instead of processing the claims payments through three different departments that are organized by process, the company could design claims payment “cells” that are organized around different types of insurance products or customers. For example, a cell could be created for all marine insurance. The cell would have data input, claims audit, and claims adjustment personnel all located together (co-located) to process marine insurance claims. This would reduce the move time between the departments considerably. In addition, the claims batches should be reduced. If the claims were processed one or two at a time in a product-focused cell, then payments might be possible on the same day that the claim is submitted, rather than 10 days later. Thus, as claims came into the cell, they would be worked on. This would be an example of “pull manufacturing (scheduling).” The cell is activated by work (demand for claim payments). The work is “pulled” through each process step in the cell until a check is delivered to the insurance customer. Claims payment software can also aid the process by transmitting claim information on electronic forms over an Intranet, rather than using paper forms.

Note to Instructors: Insurance companies, such as Aetna and Mutual Benefit Life, are actually employing just-in-time principles in their claims payment and insurance application processes.



Ex. 27–12 (FIN MAN); Ex. 12–12 (MAN)a. The present Grill Rite service delivery system is an example of a push system. Special

orders are “pushed” through the system. The order is placed at the beginning of the process and the hamburger is cooked, dressed, and then delivered to the “inventory” of finished hamburgers placed under the hot lamps. Customers are sold burgers from this finished goods inventory. Under this system, the customer wait time would besmall only if the customer ordered a “standard” burger from the inventory. If the customer placed a special order, then he or she would have to wait for the complete cook and dress cycle to be completed.

b. A new system could be designed so that a custom order is introduced after cooking the burger, rather than prior to cooking. In this way, hamburgers are made to order without the use of finished goods inventory. Under this process, assume a customer ordered a hamburger with ketchup and pickles only. The order would be received at the dressing station. Here, a food preparer would take a hamburger off the grill and place ketchup and pickles on the burger using materials at the dressing station (termed point-of-use materials). The hamburger that is pulled from the grill would create a signal (the space on the grill) for a new hamburger to be placed on the grill.In this way, hamburgers that are cooking do not have orders assigned to them. Rather, they are available to be pulled by the food preparer to satisfy customer orders. Under this system, the lead time for cooking the hamburger is eliminated from the customer wait time. The customer has only to wait for the burger to be dressed. The attractiveness of this approach is that customers can have the burgers “their way” without using finished goods inventory to provide fast response.

A variation on this answer is to have plain hamburgers pulled directly off the grill by the customer order (as above) but place the dressing stations among the customers (similar to Fuddruckers). In this way, the customers dress their own burgers after purchasing them.

Note to Instructors: You may recognize that the first system described in this exercise is similar to the method invented by McDonald’s, while Wendy’s used the second method. McDonald’s recently indicated that it was switching its method to work more like Wendy’s because of its superior service characteristics. You might also note that Dell’s manufacturing strategy is very similar to Wendy’s. It produces computers to order usingpull signals. This allows Dell to build the computer to a user specification yet still deliverit within a matter of days.



Ex. 27–13 (FIN MAN); Ex. 12–13 (MAN)The production manager probably has some good points. If the accounting system doesnot change when an organization embraces a just-in-time strategy, then there will likely be complaints. A conventional accounting system needs to have a strong accountingcontrol orientation. Under just-in-time, the accounting system can be designed with much wider transaction control intervals. The company could have a very wide transaction interval—such as between purchased parts transacted in and finished goodstransacted out. Thus, many transactions into and out of intermediate work in process inventory locations would not be needed. In addition, a raw and in process inventory account would allow the company to eliminate separate raw materials release transactions. Eliminating accounting controls would be foolhardy unless the company has strong visible controls. Otherwise, there is simply too much room for waste and very large unexplained cost variances. Under just-in-time, visible controls such as the amount of inventory, production line stoppages, statistical control charts, or emergency lights replace accounting controls.

The direct labor reporting can be eliminated. Under JIT accounting, the direct laboremployees are assigned to production cells. Their wages are treated as part of the cell’s conversion costs and are not separately traced or reported. The traditional financial measures should be supplemented with nonfinancial measures, such as schedule attainment, lead time, quality, machine uptime (availability), safety, and setup time. The nonfinancial measures can be collected and reported immediately without the need foradditional effort to translate the numbers into financial terms. In addition, cost of qualityor value-added/non-value-added activity analyses can provide financial information thatcan be used by the production department manager.



Ex. 27–14 (FIN MAN); Ex. 12–14 (MAN)

$550,0002,000 hours


= $55 per unit

c. 1. Raw and In Process Inventory*Accounts Payable 128,000

*800 units × $160 per unit

2. Raw and In Process Inventory*Conversion Costs 44,000


3. Finished Goods Inventory*Raw and In Process Inventory 172,000

*800 units × ($160 + $55) = $172,000

4. Accounts Receivable*Sales 249,600

*$780 units × $320 per unit

Cost of Goods Sold*Finished Goods Inventory 167,700

*780 units × ($160 + $55)

167,700

249,600

$275 per hour

b. Budgeted Cell ConversionCost per Unit = × $275 per hour

a. Budgeted Cell ConversionCost Rate = =

172,000

128,000

44,000



Ex. 27–15 (FIN MAN); Ex. 12–15 (MAN)

$168,0002,100 hours


= $16 per unit

c. 1. Raw and In Process Inventory*Accounts Payable 31,500


2. Raw and In Process Inventory*Conversion Costs 14,400


3. Finished Goods Inventory*Raw and In Process Inventory 44,880

*880 units × ($35 + $16)

4. Accounts Receivable*Sales 90,300


Cost of Goods Sold*Finished Goods Inventory 43,860

*860 units × ($35 + $16)

43,860

90,300

$80 per hour

b. Budgeted Cell ConversionCost per Unit = × $80 per hour

a. Budgeted Cell ConversionCost Rate = =

44,880

31,500

14,400



Ex. 27–16 (FIN MAN); Ex. 12–16 (MAN)

a. 1. Raw and In Process Inventory* 80,600Accounts Payable 80,600


2. Raw and In Process Inventory* 66,000Conversion Costs 66,000

*[($66,000 ÷ 200 hours) × (20 min. ÷ 60 min.)]= $110 per unit; $110 per unit × 600 units = $66,000

3. Finished Goods Inventory* 141,600Raw and In Process Inventory 141,600

*($130 + $110) × 590 units

4. Sales* 244,375Accounts Receivable 244,375

*$425 per unit × 575 units

Cost of Goods Sold* 138,000Finished Goods Inventory 138,000

*($130 + $110) × 575 units

b. Raw and In Process Inventory, ending balance1………………………………$5,000Finished Goods Inventory, ending balance2……………………………………$3,600

1 $80,600 + $66,000 – $141,600, orMaterials [130 per unit × (620 units – 600 units)]………………………………………… $2,600Production [($130 + $110) × (600 units – 590 units)]……………………………………… 2,400Total……………………………………………………………………………………………… $5,000

2 $141,600 − $138,000 = $3,600, or($130 + $110) × (590 units − 575 units) = $3,600



Ex. 27–17 (FIN MAN); Ex. 12–17 (MAN)

Pareto Chart of Quality Activities

0

50000

100000

150000

200000

250000

Warr

anty

claim

s

Correc

t ship

ment e

rrors

Dispos

ing sc

rapFina

l insp

ectio

n

Proces

sing c

ustom

er ret

urns

Emergen

cy eq

uipmen

t main

tenan

ceEmplo

yee t

rainin

gScra

p rep

orting

Inspe

cting

inco

ming m

ateria

ls

Preven

tive e

quipm

ent m

ainten

ance

Suppli

er de

velop

ment

Dol

lars

19© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.


Ex. 27–18 (FIN MAN); Ex. 12–18 (MAN)

a.

QualityCost

Prevention $ 72,000 9% 1.8%Appraisal 120,000 15% 3.0%Internal failure 208,000 26% 5.2%External failure 400,000 50% 10.0%

Total $800,000 100% 20.0%

1 $72,000 ÷ $800,0002 $72,000 ÷ $4,000,000

The following classifications were used to develop the cost of quality report:

Quality Activities

Correct shipment errors………………………………Disposing of scrap………………………………………Emergency equipment maintenance………………Employee training………………………………………Final inspection…………………………………………Inspecting incoming materials………………………Preventive equipment maintenance…………………Processing customer returns…………………………Scrap reporting…………………………………………Supplier development…………………………………Warranty claims…………………………………………Total………………………………………………………

b. The majority of the company’s quality efforts are in correcting quality problems. This is evident by the high percentage of quality costs associated with internal and external failure (76% of total quality costs). The highest cost activities are warranty claims, which indicates significant field failures for the product. Emergencyequipment maintenance is an internal failure because it indicates that the company is failing to preventively maintain the equipment. Emergency repairs create significant disruptions and quality problems.

Quality CostActivity Cost Classification

Percentof TotalSalesQuality Cost Classification

ACTIVE MEMORIES INC.Cost of Quality Report

Cost Summary

Internal failure80,00040,000

Percent ofTotal

Quality Cost

$120,00088,00080,00040,00080,00040,00016,000

AppraisalAppraisalPreventionExternal failure

$800,000200,000

External failureInternal failureInternal failurePrevention

External failure16,000 Prevention

21



Ex. 27–19 (FIN MAN); Ex. 12–19 (MAN)

Pareto Chart of Quality Activities

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Replace oldtechnologycable with

higher qualitycable

Replace oldtechnology

signal switcheswith higher

qualityswitches

Cable signaltesting

Re-installservice

(installedincorrectly the

first time)

Billing errorcorrection

Trainemployees

Repair satelliteequipment

Respond tocustomer homerepair requests

Repairunderground

cableconnections

Dol

lars


Amy Garner

Highlight

Amy Garner

Highlight

Amy Garner

Highlight

Amy Garner

Highlight

Amy Garner

Text Box

Discussion in 2pp ends with JR agreeing that "ing" ending should be added to all instances highlighted. Maintains consistency with text exercise. Please revise.


Ex. 27–20 (FIN MAN); Ex. 12–20 (MAN)

a.

Prevention $260,000 52% 13.0%Appraisal 70,000 14% 3.5%Internal failure 30,000 6% 1.5%External failure 140,000 28% 7.0%

Total $500,000 100% 25.0%

1 $260,000 ÷ 500,0002 $260,000 ÷ $2,000,000

b.

Value-added 66%Non-value-added 34%

Total 100%

The following classifications were used to develop the reports:

ActivityCost

Billing error correction………………… $ 50,000Cable signal testing…………………… 70,000Reinstalling service (installed

incorrectly the first time)…………… 55,000Repairing satellite equipment………… 30,000Repairing underground cable

connections to the customer……… 15,000Replacing old technology cable

with higher quality cable…………… 120,000Replacing old technology signal

switches with higher qualityswitches………………………………… 95,000

Responding to customer homerepair requests………………………… 20,000

Training employees…………………… 45,000Total……………………………………… $500,000

* This is an external failure because the underground cable connection needs to be repaired after receiving notification of disrupted service from a customer.

Quality Cost

Non-value-added

Value-added

Value-added

Non-value-addedNon-value-added

DIGITAL LIGHT INC.Cost of Quality Report

Cost Summary

Percent of

External failure*

Prevention

Non-value-added

Internal failure

VA/NVA

CategoryValue-Added/Non-Value-Added Activity Analysis


Amount

DIGITAL LIGHT INC.

Quality Activities

External failureAppraisal

External failure

Classification

Prevention

PreventionExternal failure

Percentof TotalSales

Value-added

Non-value-addedValue-added

170,000$500,000

Percent

QualityCost

TotalQuality Cost

$330,000

21



Ex. 27–20 (FIN MAN); Ex. 12–20 (MAN) (Concluded)c. The reports indicate that Digital Light Inc.’s total costs of quality are 25% of total sales.

In addition, 52% of the activity cost goes toward prevention activities. As a result, Digital Light is able to avoid high internal and external failure activities. Only 34%of the activities are non-value-added, compared to 66% that are value-added. Although there is some room for improvement, the company appears to be effectively managing its quality activities.



Ex. 27–21 (FIN MAN); Ex. 12–21 (MAN)

b. In this improvement scenario there will 237,000 (300,000 – 63,000) additional cansprocessed through the packaging operation. The same number of cans still will be processed by the mixing and filling activities.

Additional cost to packaging activity from improved process:

Packaging activity cost per can1……………………………× Number of additional cans from

improvement effort………………………………………… cansAdditional packaging activity cost…………………………

1

c. Expected activity cost per can after improvement:

The activity cost per can of the new process is improved because the number of canscompleted through the mixing and filling process increased by 237,000 cans at a small additional cost of $4,740 in the packaging activity. The mixing and filling activity costsdo not change because the improvement only impacts the number of cans processed after the filling activity, not prior to this activity. This solution simplifies by assumingthe refrigeration did not require additional activity cost. While not analyzed in this exercise, there are additional savings from less waste of materials from fewer kicks.

a. =Activity Cost per Can

$600,000 + $4,740

=

Activity Cost per Can =

$0.020 per can

Activity Cost per Can =

Number of Completed Cans

Activity Cost per Can 6,000,000 cans

Packaging ActivityCost per Can = Packaging Activity Cost

Number of Completed Cans

=

Packaging ActivityCost per Can = $120,000

6,000,000 cans

=

$ 4,740

Activity Cost

$600,000$0.10 per can

$0.097 per can6,237,000 cans

237,000

$ 0.020

Activity CostNumber of Completed Cans

=



Ex. 27–22 (FIN MAN); Ex. 12–22 (MAN)a.

Cost

Receiving claim……………………………………………… $ 80,000 20%Adjusting claim……………………………………………… 240,000 60%Paying claim…………………………………………………… 80,000 20%Total…………………………………………………………… $400,000 100%

The “adjusting claim” activity is the most significant activity in this process.

b. Average process cost per paid claim:

$400,0004,000 claims

c. Activity Cost Activity CostPrior to After

Activity Improvement Improvement

Receiving claim…………………………… $ 80,000 $ 92,000Adjusting claim…………………………… 240,000 72,000Paying claim……………………………… 80,000 80,000Total………………………………………… $400,000 $244,000

* $80,000 × 115%** $240,000 × (100% – 70%)

Note: Sometimes an activity cost within a process will need to increase in orderto realize additional benefits in another part of a process, as illustrated here.

d. Average process cost per paid claim:

$244,0004,000 claims

Percent of

= $100 per paid claim

Activity Total Process

$156,000

= $61 per paid claim

Activity Cost

(Cost)Savings

$ (12,000)168,000

0

***



Ex. 27–23 (FIN MAN); Ex. 12–23 (MAN)a.

Cost

Preparing materials request………………………………… $ 36,000 9%Requesting, receiving, and selecting

vendor bids…………………………………………………… 100,000 25%Preparing purchase order…………………………………… 20,000 5%Preparing receiving ticket…………………………………… 24,000 6%Matching M/R, R/T, and invoice…………………………… 48,000 12%Correcting reconciliation differences…………………… 140,000 35%Preparing and delivering vendor payment……………… 32,000 8%Total process activity cost………………………………… $400,000 100%

“Requesting, receiving, and selecting vendor bids” and “correcting reconciliation differences” total 60% of the total process cost. This indicates that these two activitiesare good candidates for improvement efforts.

b. Average process cost per payment:

$400,00020,000 payments

c. Activity Cost Activity CostPrior to After

Activity Improvement Improvement

Preparing materials request…………… $ 36,000 $ 36,000Requesting, receiving, and

selecting vendor bids………………… 100,000 25,000Preparing purchase order……………… 20,000 20,000Preparing receiving ticket……………… 24,000 24,000Matching M/R, R/T, and invoice………… 48,000 48,000Correcting reconciliation

differences……………………………… 140,000 35,000Preparing and delivering

vendor payment………………………… 32,000 32,000Total process activity cost……………… $400,000 $220,000

* $100,000 × (100% – 75%)** $140,000 × (10% ÷ 40%)

d. Average process cost per paid claim:

$220,00020,000 payments

$180,000

= $11 per payment

SavingsActivity Cost

$ ——

75,000—

Percent of

= $20 per payment

Activity Total Process

——

105,000

*

**

—



Prob. 27–1A (FIN MAN); Prob. 12–1A (MAN)1. Brite Lite’s purchasing policy is very short-sighted. It does not involve developing

partnerships with suppliers. Brite Lite should consider changing its arm’s lengthpolicy and work on building a long-term supply chain strategy with its suppliers. With a supply chain strategy, Brite Lite can begin to consider more than just the price ofits glass. It can work with the supplier on quality, responsive delivery, electronic data interchange invoicing, supplier raw materials logistical support, sharing of research and development efforts, and sharing of production schedules, to name a few. The arm’s length approach is more costly in the long run, even if it squeezes the last penny out of each supplier. The arm’s length approach reduces the possibility ofworking on issues that go across organizational boundaries (such as electronic data interchange, sharing demand forecasts, or more frequent just-in-time deliveries), which hold the promise of reducing the total delivered cost.

2. The hidden costs beyond the price include the costs associated with the higher inventory required by Mid-State’s delivery schedule. These inventory costs includeadditional space, handling, obsolescence, financing, and materials management costs. These costs were not considered because they are not obvious. They are also difficult to determine. The price is obvious, so it is easy to build a purchasing policy around “getting the best price.” This policy ignores the additional internal costs of the higher inventory imposed by Mid-State’s delivery schedule. These arecosts incurred by other parts of the organization, not purchasing. In a functionalorganization, purchasing would respond by saying that the additional internalinventory costs are not its problem. Those are costs incurred in another manager’s responsibility center. Of course, this is part of the problem of such simple “low-price bid” policies.

3. If the financing costs are 10%, then the additional cost of the inventory could bedetermined as follows:

At the beginning of July, the new shipment of 45,000 pounds arrives. Assuming thatthe glass supply runs out by the end of the quarter, the average inventory for the quarter is:

Beginning of July……………………………………………………… 45,000End of September……………………………………………………… 0

Total…………………………………………………………………… 45,0002

Average pounds in inventory for the quarter……………………… 22,500

PROBLEMS

÷



Prob. 27–1A (FIN MAN); Prob. 12–1A (MAN) (Concluded)The inventory carrying cost can be estimated as follows:

Average pounds in inventory for the quarter…………………………………… 22,500× Price per pound……………………………………………………………………… $28Total inventory investment………………………………………………………… $630,000Interest rate per quarter (10% ÷ 4)………………………………………………… 2.5%Inventory financing cost per quarter……………………………………………… $ 15,750

Inventory financing cost per quarter……………………………………………… $ 15,750÷ Number of pounds ordered for the quarter…………………………………… 45,000 lbs.Additional cost per pound (rounded)……………………………………………… $ 0.35 /lb.

The financing cost is 2.5% of the average quarterly inventory value, or $15,750 perquarter. This translates into an additional 35¢ per pound ($15,750 ÷ 45,000 lbs.) purchased during the quarter. Thus, just considering the financing cost by itself makes Cleveland Glass the “real” low-cost bidder.

Note to Instructors: As a point of comparison, the financing cost for Cleveland Glass’ daily deliveries is less than a cent per pound ($14,100 × 2.5% = $352.50; $352.50 ÷ 45,000 lbs. = $0.0078), because the average daily inventory investment would be only$14,100 [500 lbs. × $28.2]. (This calculation would be half this amount if it was assumed the average daily inventory was half the daily shipment, or 250 pounds [500 pounds per day ÷ 2]).

×



Prob. 27–2A (FIN MAN); Prob. 12–2A (MAN)1. Value-added time:

Assembly of PC board……………………………………………… 5 min.Stereo assembly…………………………………………………… 18Time to inspect one unit…………………………………………… 9Pack and label……………………………………………………… 8

Total………………………………………………………………… 40 min.

Non-value-added time:Wait time:Within-batch wait time—PC board assembly

(59 × 5 min.)………………………………………………………… 295 min.Within-batch wait time—final assembly

(59 × 18 min.)……………………………………………………… 1,062Within-batch wait time—testing (59 × 9 min.)………………… 531Within-batch wait time—shipping (59 × 8 min.)……………… 472Test setup…………………………………………………………… 30

Total wait time…………………………………………………… 2,390 min.

Move time:Move from PC board assembly to final assembly…………… 10 min.Move from final assembly to testing…………………………… 20

Total move time………………………………………………… 30

Total non-value-added time……………………………………… 2,420 min.

Total lead time (40 min. + 2,420 min.)…………………………… 2,460 min.

40 min.2,460 min.

2. The existing process is very wasteful. The company could improve the process bychanging the layout from a process orientation to a product orientation. Each stereo model could be formed into a production cell. Each cell would have PC board assembly, final assembly, and testing next to each other. In this way, the batch sizes could be reduced significantly. Workers could practice one-at-a-time processing and merely pass a single completed assembly through the cell. The work content would need to be made more balanced before implementingthis solution. As a result, the move time and within-batch wait time would be eliminated. The company could also initiate total quality principles. Moving toward zero defects would allow the company to reduce testing activities (and time), and as a result, the setup time for the test area might be eliminated orreduced.

Value-Added Ratio =Value-Added Lead Time

Total Lead Time

Value-Added Ratio = 1.6%=



Prob. 27–3A (FIN MAN); Prob. 12–3A (MAN)

$756,0002,400 hours

= $105 per unit

3. a. Raw and In Process Inventory*Accounts Payable 730,000

*7,300 units × $100 per unit

b. Raw and In Process Inventory*Conversion Costs 756,000


c. Finished Goods Inventory*Raw and In Process Inventory 1,465,750

*7,150 units × ($100 + $105)

d. Accounts Receivable*Sales 2,800,000


Cost of Goods Sold*Finished Goods Inventory 1,435,000

*7,000 units × ($100 + $105)

4. Raw and In Process Inventory:$730,000 + $756,000 – $1,465,750 = $20,250

Finished Goods Inventory:$1,465,750 – $1,435,000 = $30,750or(7,150 units – 7,000 units) × ($100 + $105) = $30,750

1,435,000

2,800,000

$315 per hour

2. Budgeted Cell ConversionCost per Unit =

1. Budgeted Cell ConversionCost Rate = =

$315 per hr. × (20 min. ÷ 60 min.)

730,000

756,000

1,465,750



Prob. 27–3A (FIN MAN); Prob. 12–3A (MAN) (Concluded)5. JIT accounting is different from traditional accounting in a number of respects. Most

importantly, JIT accounting is simplified and uses minimal control. As a result, the number of transactions are reduced, and the control intervals between adjacent work in process transaction points are widened. In many JIT operations, there areno separate materials or work in process inventories. Rather, purchased materials are charged to an account that combines raw materials and work in process, termed the “raw and in process inventory” account. Direct labor is frequently eliminated as a cost category and is instead included as a conversion cost ofthe cell. The cell conversion cost is applied to the raw and in process inventoryaccount. Indirect labor can frequently be assigned to a production cell. As a result, these costs do not need to be allocated, since they are included directly in the cell’s conversion cost. Often, nonfinancial performance measures, such as lead time or quality measures, are used to monitor performance.



Prob. 27–4A (FIN MAN); Prob. 12–4A (MAN)1.

Pareto Chart-Quality Activities

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

Correct errorsidentified bycustomers

(claim, check,application

errors)

Correct jams Correct scanerrors

Scan Programscanner

Re-run jobdue to scan

reading errors

Load Verify scanaccuracy viareconciling

totals

Log-in controlcodes (for

laterreconciliation)

Verify scanneraccuracy with

test run

Dol

lars


Amy Garner

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Amy Garner

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Verifying

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Cross-Out

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election commission

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ing

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Inserted Text

ing

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Inserted Text

ning

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Cross-Out

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Rerunning

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Please make changes by adding "ing" endings per agreement of JR in 2pp notes.

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ing

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ing

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Cross-Out

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ging

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ing

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Is this one OK without change? Seems a bit odd so wanted to verify.


Prob. 27–4A (FIN MAN); Prob. 12–4A (MAN) (Continued)The following classifications are used in answering (2) and (3):

ActivityCost

Correcting errors identifiedby election commission………… $ 84,000

Correcting jams……………………… 66,000Correcting scan errors…………… 33,000Loading……………………………… 15,000Logging-in control codes

(for later reconciliation)………… 12,000Program scanner…………………… 21,000Rerunning job due to scan

reading errors……………………… 18,000Scanning……………………………… 30,000Verifying scan accuracy via

reconciling totals………………… 12,000Verifying scanner accuracy

with test run……………………… 9,000Total…………………………………… $300,000

2. Percent of total activity cost for each quality cost (and nonquality cost) classification:

Prevention…………………………………………… 3%Appraisal……………………………………………… 8%Internal failure………………………………………… 39%External failure……………………………………… 28%Not a cost of quality………………………………… 22%

Total………………………………………………… 100%

Value-added

Value-added

Value-added

Not a quality cost

Prevention

Appraisal

Internal failure

Appraisal

Non-value-added

External failureInternal failureInternal failureNot a quality cost

Activity ClassificationClassification

Value-Added/


Not a quality cost

Cost of Quality Non-Value-Added

Non-value-added

Value-addedValue-added

Non-value-addedNon-value-addedValue-added

84,00066,000

Percent of TotalDepartment Cost

ActivityCost

$300,000

$ 9,00024,000

117,000



Prob. 27–4A (FIN MAN); Prob. 12–4A (MAN) (Concluded)3. Percentages of total activity cost that are value- and non-value-added:

Value-added………………………………………… 33%Non-value-added…………………………………… 67%

100%

4. The department has 67% of its total costs as non-value-added. This is a very significant amount. Internal failure represents 39% of the total costs. This represents significant opportunity for cost savings. In addition, the external failure costs of 28% of the total may understate the true damage caused by external failure. The potential dissatisfaction and political ill will are not accounted for in this analysis.


ActivityCost

$300,000201,000

$ 99,000



Prob. 27–1B (FIN MAN); Prob. 12–1B (MAN)1. HD Hogg’s purchasing policy is very short-sighted. It does not involve

developing partnerships with suppliers. HD Hogg should consider changing its arm’s length policy and work on building a long-term supply chain strategy with its suppliers. With a supply chain strategy, HD Hogg can begin to consider more than just the price of its frames. It can work with the supplier on quality, responsive delivery, electronic data interchange invoicing, supplier raw materials logistical support, sharing of research and development efforts, and sharing of production schedules, to name a few. The arm’s length approach is more costly in the long run, even if it squeezes the last penny out of each supplier. The arm’s length approach reduces the possibility of working on issues that go across organizational boundaries (such as electronic data interchange, sharing forecast information, or more frequent just-in-time deliveries), which hold the promise of reducing the total delivered cost.

2. The hidden costs beyond the price include the costs associated with the higher inventory required by Iron Horse Frames’ delivery schedule. These inventory costs include additional space, handling, obsolescence, financing, and materials management costs. These costs were not considered because they are not obvious. They are also difficult to determine. The price is obvious, so it is easy to build a purchasing policy around “getting the best price.” This policy ignores the additional internal costs of the higher inventory imposed by Iron Horse Frames’ delivery schedule. These are costs incurred by other parts of the organization, not purchasing. In a functional organization, purchasing would respond by saying that the additional internal inventory costs are not its problem. Those are costs incurred in another manager’s responsibility center. Of course, this is part of the problem of such simple “low-price bid” policies.



Prob. 27–1B (FIN MAN); Prob. 12–1B (MAN) (Concluded)3. If the financing costs are 12%, then the additional cost of the inventory could be

determined as follows:

At the beginning of July, the new shipment of 4,500 frames arrives. Assuming that the frame supply runs out by the end of the quarter, the average inventory for thequarter is:

Beginning of July………………………………………………… 4,500End of September………………………………………………… 0

Total……………………………………………………………… 4,5002

Average frames in inventory for the quarter………………… 2,250

The inventory carrying cost can be estimated as follows:

Average frames in inventory for the quarter………………… 2,250× Price per frame…………………………………………………… $300Total inventory investment……………………………………… $675,000Interest rate per quarter (12% ÷ 4)……………………………… 3%Inventory financing cost per quarter…………………………… $ 20,250

Inventory financing cost per quarter…………………………… $ 20,250÷ Number of frames ordered for the quarter………………… 4,500 framesAdditional cost per frame………………………………………… $ 4.50 per frame

The financing cost is 3% of the average quarterly inventory value, or $20,250 perquarter. This translates into an additional $4.50 per frame ($20,250 ÷ 4,500 frames)purchased during the quarter. Thus, just considering the financing cost by itself makes Famous Frames the “real” low-cost bidder.

Note to Instructors: As a point of comparison, the financing cost for Famous Frames’daily deliveries is 10¢ per frame ($15,050 × 3% = $451.50; $451.50 ÷ 4,500 frames = $0.10), because the average daily inventory investment would be only $15,050 [(50 frames per day) × $301]. (This calculation would be half this amount if it wasassumed the average daily inventory was half the daily shipment, or 25 frames[50 frames per day ÷ 2]).

÷

×



Prob. 27–2B (FIN MAN); Prob. 12–2B (MAN)1. Value-added time:

Stamping……………………………………………………………… 5 min.Appliance assembly………………………………………………… 22Time to test one unit………………………………………………… 8Pack and shipment labeling……………………………………… 15

Total………………………………………………………………… 50 min.

Non-value-added time:Wait time:Within-batch wait time—stamping (39 × 5 min.)……………… 195 min.Within-batch wait time—final assembly

(39 × 22 min.)……………………………………………………… 858Within-batch wait time—testing (39 × 8 min.)………………… 312Within-batch wait time—shipping (39 × 15 min.)……………… 585Stamping setup……………………………………………………… 60

Total wait time…………………………………………………… 2,010 min.

Move time:Move from stamping to final assembly………………………… 10 min.Move from final assembly to testing…………………………… 25Total move time……………………………………………………… 35 min.Total non-value-added time……………………………………… 2,045 min.

Total lead time (50 min. + 2,045 min.)…………………………… 2,095 min.

50 min.2,095 min.

2. The existing process is very wasteful. The company could improve the processby changing the layout from a process orientation to a product orientation. Each appliance model could be formed into a production cell. Each cell would have stamping, final assembly, testing, and shipping next to each other. In this way, the batch sizes could be reduced significantly. Workers could practice one-at-a-time processing and merely pass a single completed assembly through the cell. As a result, the move time and within-batch wait time would be eliminated. The company could also initiate total quality principles. Moving toward zero defects would allowthe company to reduce inspecting activities. A product-dedicated flow would alsoeliminate the need to perform stamping machine setups, since all the stampings would be the same for a given product model.

Value-Added Ratio =Value-Added Lead Time

Total Lead Time

Value-Added Ratio = 2.4%=



Prob. 27–3B (FIN MAN); Prob. 12–3B (MAN)

$189,0002,100 hours

= $18 per unit

3. a. Raw and In Process Inventory*Accounts Payable 1,979,500


b. Raw and In Process Inventory*Conversion Costs 189,000


c. Finished Goods Inventory*Raw and In Process Inventory 2,070,600

*10,200 units × ($185 + $18)

d. Accounts Receivable*Sales 5,000,000


Cost of Goods Sold*Finished Goods Inventory 2,030,000

*10,000 units × ($185 + $18)

4. Raw and In Process Inventory:$1,979,500 + $189,000 – $2,070,600 = $97,900

Finished Goods Inventory:$2,070,600 – $2,030,000 = $40,600or(10,200 units – 10,000 units) × ($185 + $18) = $40,600

2,030,000

5,000,000

$90 per hour

2. Budgeted ConversionCost per Unit =

1. Budgeted Cell ConversionCost Rate = =

$90 per hr. × (12 min. ÷ 60 min.)

1,979,500

189,000

2,070,600



Prob. 27–3B (FIN MAN); Prob. 12–3B (MAN) (Concluded)5. JIT accounting is different from traditional accounting in a number of respects. Most

importantly, JIT accounting is simplified and uses minimal control. As a result, the number of transactions is reduced, and the control intervals between adjacent work in process transaction points are widened. In many JIT operations, there are no separate materials or work in process inventories. Rather, purchased materials are charged to an account that combines raw materials and work in process, termed the “raw and in process inventory” account. Direct labor is frequently eliminated as a cost category and is instead included as a conversion cost of the cell. The cell conversion cost is also applied to the raw and in process inventory account. Indirect labor can frequently be assigned to a production cell. As a result, these costs do notneed to be allocated, since they are included directly in the cell’s conversion cost. Often, nonfinancial performance measures, such as lead time or quality measures, are used to monitor performance.



Prob. 27–4B (FIN MAN); Prob. 12–4B (MAN)1.

Pareto Chart of Activities

0

20000

40000

60000

80000

100000

120000

Produc

e prod

uct

Dispos

e scra

pIns

pect

work in

proc

ess

Exped

ite pr

oduc

tion l

ate pr

oduc

tion

Final in

spec

tion

Preven

tive m

achin

e main

tenan

ce

Respo

nd to

custo

mer qu

ality

compla

ints

Dispos

e inc

oming

mate

rials

with po

or qu

ality

Correc

t invo

ice er

rors

Inspe

ct inc

oming

mate

rials

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Producing

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Disposing

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Inspecting

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Expediting

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Highlight

Responding

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Disposing

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Highlight

Correcting

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Inspecting

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Prob. 27–4B (FIN MAN); Prob. 12–4B (MAN) (Continued)The following classifications are used in answering (2) and (3):

ActivityCost

Correcting invoice errors……… $7,500Disposing of incoming

materials with poor quality…… 15,000Disposing of scrap……………… 27,500Expediting late production…… 22,500Final inspection………………… 20,000Inspecting incoming

materials………………………… 5,000Inspecting work in process…… 25,000Preventive machine

maintenance…………………… 15,000Producing product……………… 97,500Responding to customer

quality complaints……………… 15,000Total…………………………… $250,000

2. Percent of total activity cost for each quality cost (and nonquality cost) classification:

Prevention………………………………………… 6%Appraisal…………………………………………… 20%Internal failure……………………………………… 26%External failure…………………………………… 9%Not a cost of quality……………………………… 39%

Total……………………………………………… 100%

Appraisal

External failure

Not a quality cost


Non-value-added



Appraisal

Cost of Quality Non-Value-Added

Non-value-added

Value-added

Activity

External failure

Internal failure

ClassificationClassification

Value-Added/

Non-value-addedNon-value-addedNon-value-added

Internal failure

Prevention

Internal failureAppraisal

$250,000

$ 15,00050,00065,00022,50097,500


ActivityCost



Prob. 27–4B (FIN MAN); Prob. 12–4B (MAN) (Concluded)3. Percentages of total activity cost that are value- and non-value-added:

Value-added………………………………………… 65%Non-value-added…………………………………… 35%

100%

4. The company has 65% of its total costs as value-added. However, there is still roomfor significant improvement. Internal failure represents 26% of the total costs. This represents significant opportunity for cost savings. In addition, the external failure costs of 9% of the total may understate the true damage caused by external failure.The potential dissatisfaction, ill will, and lost future sales are not accounted for in this analysis.


ActivityCost

$250,00087,500

$162,500



CP 27–1 (FIN MAN); CP 12–1 (MAN)The controller should confront the plant manager. The plant manager is attempting to skewthe sampling results by giving the sampled items special treatment. The original intent ofthe sampling plan is to represent the average performance of the manufacturing process.Thus, the tagged items should receive no better treatment than the average product being produced. The plant manager’s memo will cause the lead times reported to central management to be much better than they actually are. Thus, it is possible that salespersonsand marketing personnel will begin to make shipping commitments to customers based on the reported lead times. Since the plant is unable to perform for all products at the reported levels, customers may be left angry when the commitments are not met.

The controller should first insist that the plant manager issue a new memo to all employees,reversing the first memo. The controller should help the plant manager see that skewing the results will provide only a short-term benefit. Eventually, this action will come back tohaunt them as the real performance of the plant becomes evident to customers and top management. Top management will be very displeased with a deliberate attempt on thepart of the plant manager to “cook the numbers.” If the plant manager fails to agree to this, the controller may need to report this incident to the company’s chief financial officer.

It would be unethical for the controller to fail to address this issue. The Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management states that the management accountant must communicate information fairly and objectively and disclose all fully relevant information that could reasonably be expected to influence the intended user’s understanding of the information.

CASES & PROJECTS



CP 27–2 (FIN MAN); CP 12–2 (MAN)Clark’s claim that the inventory doesn’t cost the company anything is likely not true. At the very minimum, inventory requires working capital to be used. The financing cost associated with the working capital represents a cost to the company. In addition, the inventory requires space, insurance, security, and movement. Thus, these additional costs will be incurred to store the inventory. Beyond the carrying (interest) and storage costs are the costs associated with obsolescence. The company may be required to write off some of the space heaters or mark them down significantly to sell them. These markdowns are also a cost associated with the inventory. All of this can make the cost of inventory very high.

Jennings should suggest that Clark use just-in-time manufacturing principles. The production process could be scheduled using pull techniques. This would mean that the plant produces products only when there are orders. Products would not be manufactured for inventory. In addition, the plant manager should work to develop a reliable supply chain. One of the objectives of the supply chain management would be to improve supplier shipment reliability, so that materials inventory could be at a minimum. Lastly, the CEO should consider revising the performance measures used in the plant. The unitcost performance measures drive the plant manager to produce as much as possible in order to absorb fixed costs. Rather, the plant manager should be evaluated on meetingcustomer shipment requirements, making high-quality product, using short lead times, and reducing scrap and wasted employee effort.

CP 27–3 (FIN MAN); CP 12–3 (MAN)All three charts indicate a steadily deteriorating situation. It seems clear that Maxxim is not employing just-in-time strategies. The inventory is growing steadily, yet the companyis unable to meet delivery commitments. Essentially, Maxxim is attempting to forecastdemand but is doing a poor job of it. As a result, Maxxim continues to build inventory, but it has the wrong mix for the actual demand. Thus, inventory keeps on growing with the wrong products. The company seems constantly short of the products that are actually demanded. The lead times continue to expand, making the problem even worse. The long lead times force the company to rely even more on forecasts, which in turn leads to even worse schedule performance. The company’s performance is trending downward. A just-in-time approach will begin to correct this problem.



CP 27–4 (FIN MAN); CP 12–4 (MAN)

Non-Value-Total Classifi- AddedCost cation Costs

Processing sales orders $ 68,000 17% VADisposing of scrap 96,000 24% NVA $ 96,000Expediting work orders 80,000 20% NVA 80,000Producing parts 44,000 11% VAResolving supplier quality

problems 56,000 14% NVA 56,000Reissuing corrected

purchase orders 40,000 10% NVA 40,000Expediting customer orders 16,000 4% NVA 16,000Total $400,000 100% $288,000Percent of non-value-added

costs to total costs 72%

The activity information can be separated into the value-added and non-value-addedcomponents. When this is done, it becomes clear that the company has a large percentage of non-value-added activities. Seventy-two percent of Pryor's factory overhead effort is non-value-added. Activities such as expediting, disposing of scrap, resolving problems, and reissuing orders are indicators of process delays, interruptions, rework, and mistakes.As such, the company should be motivated to improve its processes in order to reduce the amount of non-value-added activity included in its cost structure.

The general ledger report provides information only about where money is spent, suchas salaries or supplies, not how the resources were used. Thus, the general ledger information may not motivate improvement efforts, since the non-value-added activitiesare less visible in the general ledger.

PRYOR COMPANY

Activity

Value-Added/Non-Value-Added Activities Report

Percentof Total



CP 27–5 (FIN MAN); CP 12–5 (MAN)This would be a good assignment for groups of students to report back to the class. Eachof the groups will likely go to different restaurants at different times of the day and willhave different results. The results could be shared with the class, and “averages” could be determined for the various non-value-added categories. The following types of activitieswill likely be noted in students’ reports:

Waiting to be seated………………………………………… Non-value-addedBeing seated………………………………………………… Value-addedWaiting to give drink order………………………………… Non-value-addedGiving drink order…………………………………………… Value-addedWaiting to receive drink…………………………………… Non-value-addedGiving meal order…………………………………………… Value-addedWaiting for meal order……………………………………… Non-value-addedEating meal…………………………………………………… Value-addedWaiting for check (after meal is finished)……………… Non-value-addedReviewing check (appraisal)……………………………… Value-addedWaiting to pay with credit card…………………………… Non-value-addedWaiting to get receipt and credit card back…………… Non-value-addedWalking out of restaurant………………………………… Value-added

It is useful to note that the restaurant experience involves conversation during the“non-value-added” wait time. Naturally, this is part of the fun of restaurants. Thus, this analysis is an extreme interpretation of effectiveness and efficiency in this industry.


CHAPTER 27 (FIN MAN); CHAPTER 12 (MAN) COST MANAGEMENT … Content... · 13. The cost of a process...

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