For example some students may include materials

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Intermediate Accounting: Reporting and Analysis
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Chapter 12 / Exercise E12-6
Intermediate Accounting: Reporting and Analysis
Jones/Wahlen
Expert Verified
some of the cost categories are also plausible. For example, some students may include materials handling,materials procurement, and inspection costs and preventive maintenance as value-added costs (costs thatcustomers perceive as adding value and as being necessary for good repair service) rather than as in the gray area.Preventive maintenance, for instance, might be regarded as value-added because it helps prevent nonvalue-addingbreakdown maintenance.2.Total costs in the gray area are $180,000. Of this, we assume 60%, or $108,000, are value-added and 40%,or $72,000, are nonvalue-added.Total value-added costs: $1,100,000 + $108,000 $1,208,000Total nonvalue-added costs: $230,000 + $72,000 302,0009-17
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Intermediate Accounting: Reporting and Analysis
The document you are viewing contains questions related to this textbook.
Chapter 12 / Exercise E12-6
Intermediate Accounting: Reporting and Analysis
Jones/Wahlen
Expert Verified
Total costs$1,510,000Nonvalue-added costs are $302,000 ÷ $1,510,000 = 20% of total costs.Value-added costs are $1,208,000 ÷ $1,510,000 = 80% of total costs.3.Effect on Costs Classified asProgramValue-Added Nonvalue-AddedGray Area(a)Quality improvement programs toreduce rework costs by 40% (0.40 $90,000)reduce expediting costs by 40% (0.40 $65,000)reduce materials and labor costs by 5% (0.05 $1,100,000)Total effect–$ 55,000–$ 55,000–$ 36,00026,000–$ 62,000(b) Working with suppliers toreduce materials procurement and inspectioncosts by 20% (0.20 $45,000)reduce materials handling costs by 30%(0.30 $80,000)Total effectTransferring 60% of gray area costs (0.60 $33,000 = $19,800) as value-added and 40% (0.40 $33,000 = $13,200) as nonvalue-addedEffect on value-added and nonvalue-added costs –$ 19,800–$ 19,800–$ 13,200–$ 13,200–$ 9,00024,00033,000+ 33,000$ (c)Maintenance programs toincrease preventive maintenance costs by 70% (0.70 $55,000) decrease breakdown maintenance costs by 50% (0.50 $75,000)Total effectTransferring 60% of gray area costs (0.60 $38,500 =$23,100) as value-added and 40% (0.40 $38,500= $15,400) as nonvalue-addedEffect on value-added and nonvalue-added costs+$ 23,100+$ 23,100–$ 37,50037,500+ 15,400–$22,100+$38,500+ 38,50038,500$ Total effect of all programsValue-added and nonvalue-added costs calculated in requirement 2Expected value-added and nonvalue-added costs as a result of implementing these programs–$ 51,7001,208,000$1,156,300–$ 97,300302,000$204,700If these programs had been implemented, total costs would have decreased from $1,510,000 (requirement 2) to$1,156,300 + $204,700 = $1,361,000, and the percentage of nonvalue-added costs would decrease from 20%(requirement 2) to $204,700 ÷ $1,316,000 = 15%. These are significant improvements in Magill’s performance.
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13-19 Target costs, effect of product-design changes on product costs. Neuro Instruments uses a manufacturing costing system with one direct-cost category (direct materials) and three indirect-cost categories:6a.Setup, production order, and materials-handling costs that vary with the number of batches 7b.Manufacturing-operationscoststhatvarywithmachine-hours 8c. Costs of engineering changes that vary with the number of engineering changes made In response to competitive pressures at the end of 2012, Neuro Instruments used value-engineering tech- niques to reduce manufacturing costs. Actual information for 2012 and 2013 is as follows:The management of Neuro Instruments wants to evaluate whether value engineering has succeeded in

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