cost ch 12

cost ch 12 - 125 1 A process is a collection of activities...

This preview shows pages 1–3. Sign up to view the full content.

12–5 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%. By so doing, Honley will save 21% (0.30 × 0.70) of its clerical time. Thus, about four clerks can be eliminated by reassigning them to other areas or simply laying them off. This will produce savings of about \$120,000 per year. This is an example of process improvement—an incremental increase in process efficiency resulting in a cost reduction. 12–8 1. Fixed activity rate = SP = \$400,000/20,000 = \$20 per inspection hour Cost of unused capacity: SP × SQ SP × AQ SP × AU \$20 × 0 \$20 × 20,000 \$20 × 18,000 \$0 \$400,000 \$360,000 \$400,000 U \$40,000 F Volume Variance Unused Capacity Variance The activity volume variance measures the non-value-added cost. The unused capacity variance is a measure of the potential to reduce the spending on an activity and, thus, reduce the non-value-added costs. In this case, since the resource is acquired one person at a time, there exists sufficient unused capacity to reduce the inspectors by one. For a non-value-added activity, the goal of management should be to increase the unused capacity variance so that the activity capacity can be reduced. Thus, the variance is favorable in the short-run because it signals the fact that the activity demand is being reduced. But the activity cost must also be reduced whenever it is possible to do—as it is in this case.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
12–8 Concluded 2. Value-added costs = \$20 × 0 = \$0 Non-value-added costs = \$20 × 20,000 = \$400,000 A value-added cost report would be as follows: Value-Added Non-Value-Added Actual Inspecting. ..................... \$0 \$400,000 \$400,000 Highlighting non-value-added costs shows managers where savings are possible and emphasizes the need for improvement. In this case, reducing inspection hours to zero will create unused capacity of 20,000 hours, allowing the company to save \$400,000 in salaries. 3. Inspection is a state-detection activity and not state changing and is, therefore, non-value- added. It exists because suppliers must be producing a significant number of defective materials (components). It does produce benefits in the sense that culling out defective units or rejecting especially bad shipments will reduce costs downstream (e.g., rework and warranty costs). This reveals the possibility that non-value-added activities may produce
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 7

cost ch 12 - 125 1 A process is a collection of activities...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online