# Reducing the target manufacturing cost per unit of

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Chapter 12 / Exercise E12-6
Intermediate Accounting: Reporting and Analysis
Jones/Wahlen
Expert Verified
reducing the target manufacturing cost per unit of one of its products, HJ6, by 5%. 1.Calculate the manufacturing cost per unit of HJ6 in 2012. 2.  Calculate the manufacturing cost per unit of HJ6 in 2013. 3.  Did Neuro Instruments achieve the target manufacturing cost per unit for HJ6 in 2013? Explain. 4.  Explain how Neuro Instruments reduced the manufacturing cost per unit of HJ6 in 2013. 5.  What challenges might managers at Neuro Instruments encounter in achieving the target cost? How might they overcome these challenges? 13-19 (20 min.) Target costs, effect of product-design changes on product costs. 9-19
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Chapter 12 / Exercise E12-6
Intermediate Accounting: Reporting and Analysis
Jones/Wahlen
Expert Verified
1. and 2. Manufacturing costs of HJ6 in 2012 and 2013 are as follows: 2012 2013 Per Unit Per Unit Total (2) = Total (4) = (1) (1) ÷ 2,700 (3) (3) ÷ 4,600 Direct materials, \$1,400 × 2,700; \$1,300 × 4,600 \$3,780,000 \$1,400 \$5,980,000\$1,300 Batch-level costs, \$8,900 × 60; \$8,000 × 70 534,000 198 560,000 122 Manuf. operations costs, \$64 × 20,000; \$48 × 30,000 1,280,000 474 1,440,000 313 Engineering change costs, \$16,000 × 24; \$8,000 × 7 384 ,000 142 56 ,000 12 Total \$5 ,978,000 \$2 ,214 \$8 ,036,000 \$1 ,747 3. Target manufacturing cost per unit of HJ6 in 2013 = Manufacturing cost per unit in 2012 × 95% = \$2,214 × 0.95 = \$2,103 Actual manufacturing cost per unit of HJ6 in 2013 was \$1,747. Hence, Neuro did achieve its target manufacturing cost per unit. 4. To reduce the manufacturing cost per unit in 2013, Neuro reduced the cost per unit in each of the four cost categories—direct materials costs, batch-level costs, manufacturing operations costs, and engineering change costs. It also reduced machine-hours and number of engineering changes made—the quantities of the cost drivers. In 2012, Neuro used 7.407 machine-hours per unit of HJ6 (20,000 machine-hours 2,700 units). In 2013, Neuro used 6.522 machine-hours per unit of HJ6 (30,000 machine-hours 4,600 units). Neuro reduced engineering changes from 24 in 2012 to 7 in 2013. Neuro achieved these gains through value engineering activities that retained only those product features that customers wanted while eliminating nonvalue-added activities and costs. 5. Neuro’s managers might encounter the following challenges in achieving the target costs: Employees may feel they are being pushed too hard to attain target costs. The actual costs in 2013 are well below the target costs. Employees may feel that the severe cost cutting may result in quality problems that they will then be blamed for such as not making the necessary engineering changes Organizational conflicts may develop as the burden of cost cutting falls unequally on different business functions in the company’s value chain To overcome these challenges, managers should: (1) encourage employee participation and engagement; (2) focus on the customer; (3) clearly communicate goals and the strategy behind them; and (4) set cost-cutting targets for all value-chain functions to encourage a culture of teamwork and cooperation. 13-21 Cost-plus target return on investment pricing. John Branch is the managing partner of a business that has just finished building a 60-room motel. Branch anticipates that he will rent these rooms for 16,000 nights next year (or 16,000 room-nights). All rooms are similar and will rent for the same price. Branch estimates the following operating costs for next year: 9-20