Value added costs a materials and labor for regular

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Managerial Accounting: The Cornerstone of Business Decision-Making
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Chapter 7 / Exercise 7-40
Managerial Accounting: The Cornerstone of Business Decision-Making
Hansen/Mowen
Expert Verified
Value-added costs a. Materials and labor for regular repairs $1,100,000 Nonvalue-added costs b. Rework costs c. Expediting costs caused by work delays g. Breakdown maintenance of equipment Total $ 90,000 65,000 75,000 $ 230,000 Gray area d. Materials handling costs e. Materials procurement and inspection costs f. Preventive maintenance of equipment Total $ 80,000 45,000 55,000 $ 180,000
13-3
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Managerial Accounting: The Cornerstone of Business Decision-Making
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Chapter 7 / Exercise 7-40
Managerial Accounting: The Cornerstone of Business Decision-Making
Hansen/Mowen
Expert Verified
Classifications of value-added, nonvalue-added, and gray area costs are often not clear-cut. Other classifications of 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 that customers 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- adding breakdown 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 $1,208,000 Total nonvalue-added costs: $230,000 + $72,000 302,000 Total costs $1,510,000 Nonvalue-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. 13-4
3. Effect on Costs Classified as Program Value- Added Nonvalue- Added Gray Area (a) Quality improvement programs to reduce 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 –$ 36,000 26,000 –$ 62,000 (b) Working with suppliers to reduce materials procurement and inspection costs by 20% (0.20 $45,000) reduce materials handling costs by 30% (0.30 $80,000) Total effect Transferring 60% of gray area costs (0.60 $33,000 = $19,800) as value-added and 40% (0.40 $33,000 = $13,200) as nonvalue-added Effect on value-added and nonvalue-added costs –$ 19,800 –$ 19,800 –$ 13,200 –$ 13,200 –$ 9,000 24,000 33,000 + 33,000 $ 0 (c) Maintenance programs to increase preventive maintenance costs by 70% (0.70 $55,000) decrease breakdown maintenance costs by 50% (0.50 $75,000) Total effect Transferring 60% of gray area costs (0.60 $38,500 = $23,100) as value-added and 40% (0.40 $38,500 = $15,400) as nonvalue-added Effect on value-added and nonvalue-added costs +$ 23,100 +$ 23,100 –$ 37,500 37,500 + 15,400 –$ 22,100 +$38,500 + 38,500 38,500 $ 0 Total effect of all programs Value-added and nonvalue-added costs calculated in requirement 2 Expected value-added and nonvalue-added costs as a result of implementing these programs –$ 51,700 1,208,000 $1,156,300 –$ 97,300 302,000 $204,700 If 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. 13-5

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