Exercise 19.2
Assume you have just been hired as the management accountant in charge of providing your firm’s managers with product cost information. Identify the activities you might undertake for the following four value chain components:
Research and development – Activities include developing new technologies with minimum cost, introducing target costing and bringing it down to a predetermined level, developing cost estimation method, and finding out new sources of acquisition of resources.
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Production – Activities include reducing material and labor cost, maximizing the utilization of resources, reducing wastage and idle time, and increasing the existing capacity according to the needs.
Marketing- Activities include introducing new modern marketing technology, brining distribution cost to minimum value, educating market intermediaries and customers, and ensuring efficient utilization and functioning of the marketing channel.
Customer service- Activities include ensuring the satisfaction of customers at the grass route level, creation of loyal customers, reduction of costs of after sales, and using multi channels and competent agents.
Exercise 19.4
On its web site, manufacturing engineering lists several sample projects. With a team of students choose a project from the list and answer the following questions. The sample project chosen is Manufacturing Engineering Services.
What part of the value chain is targeted by the sample project? The sample project targets changes in existing products meaning that it targets the manufacturing phase of the value of the value chain.
What benefits can be identified from the project? Benefits of the project is that it has an increased productivity and reduces wait time and the inventories in process.
Do you believe target costing, activity-based management, cost of quality management, or just-in-time inventory was useful in the project your team looked at? Why? Target costing would help in reengineering the process because it targets the existing products and processes.
Exercise 19.4 A
Blake Furniture, Inc., maintains an Accounts Receivable Department that currently employs eight people. Blake is interested in doing an activity analysis because an outside firm has offered to take over a portion of the activities currently handled by the Accounts Receivable Department. The four main activities handled by the department are (1) billing and recording payments, (2) customer service activities, (3) financial reporting and analysis, and (4) collecting delinquent accounts.
The salaries paid to the department's employees are as follows:
Manager, 1 @ $60,000 per year: $ 60,000
Clerks, 5 @ $30,000 per year: 150,000
Account specialists, 2 @ $40,000 per year: 80,000
Total $ 290,000
Using the information given, prepare an activity table to calculate the labor cost for personnel devoted to each of the four main activities of the Accounts Receivable Department.
The activity table was prepared as:
| Labor Category |
Activity Category |
Total Labor Resources | |||
| Billing & Recording Payments | Customer Service | Financial Reporting & Analysis | Delinquent Accounts | ||
| Manager | ¼ time $15,000 | ¼ time $15,000 | ¼ time $15,000 | ¼ time $15,000 | $60,000 |
| Clerks | 1/2 time $75,000 | ¼ time $37,500 | ¼ time $37,500 | 0 $0 | $150,000 |
| Accounts Specialists | 0 $0 | ¼ time $20,000 | ¼ time $20,000 | 1/2 time $40,000 | $80,000 |
| Total Activity Resources | $90,000 | $72,500 | $72,500 | $55,000 | $290,000 |
Should Blake accept Paypro’s offer to take over its delinquent account activities.
Blake should not accept Paypro’s offer to take over its delinquent account activities. Paypro is has proposed that it can perform the activities at a fee of $50,000 per year. They argue that, that is less than the current $80,000 Blake pays to the specialist who currently handle all delinquent accounts. However, those specialists only devote spend half their time on delinquent accounts which is equivalent to about $40,000. If Blake pays Paypro $50,000, it would be able to save only $40,000 in salary costs causing a net increase of $10,000 in costs.
Exercise 19.6
Nanner Corporation is trying to determine how long it takes for one product to pass through the production process. The following information was gathered regarding how many days the product spent in various production activities:
Activity ------------Number of days
Inspection ---------------5
Storage ------------------6
Assembly ---------------3
Handling ----------------2
Painting -----------------3
Packaging---------------1
which of the above activities are value added? Assembly and Paintings
What is Nanner's total cycle time?
Activity Number of days Inspection 5 days Storage 6 days Assembly 3 days Handling 2 days Painting 3 days Packaging 1 day Total cycle time 20 days
Determine Nanner's manufacturing efficiency ratio?
Manufacturing efficiency ratio = Value-added time/ Total Cycle time
Value-added time = 3 days in assembly + 3 days in painting = 6 days
= 6 / 20 = 30%
If Nanner implements a total quality management program and a just in time inventory system which of the above activities could be eliminated? What would be the change in Nanner's manufacturing efficiency ratio?
TQM will reduce 5 days in inspection
JIT will reduce 6 days in storage
Total reduction 11 days
Revised Total cycle time = 20 days - 11 days = 9 days
Revised manufacturing efficiency ratio = 6 days / 9 days = 66.67%
Problem 19.1
Castner Corporation is considering implementation of a JIT inventory system. The company’s industrial engineer recently conducted a study to determine the average number of days spent in each activity of the production process. The following table summarizes her findings:
Production Activity Number of Days
Inspecting materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 3
Storing materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . .. 17
Moving materials into production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Setting up production equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . .. 2
Cutting materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 6
Bending materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Assembling finished products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Painting finished products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Instructions
Identify Castner’s value-added production activities. Painting finished products, cutting materials, bending materials, and assembling finished products. Total value added time; 25 days.
Identify Castner’s non-value-added production activities. Inspecting materials, storing materials, moving materials into production, and setting up production equipment. Total; 25 days.
Calculate Castner’s total cycle time. 50 days
Determine Castner’s manufacturing efficiency ratio.
Value-Added Time ÷Total Cycle Time.
Total value-added time = 25 days.
Total Cycle Time = 50 days.
25 ÷ 50 = 50%
Which of the above activities might be reduced or eliminated if Castner implemented a JIT system? Storing materials- possibly reduced or eliminated. Moving materials into production- reduced. Inspecting materials – reduced or eliminated.
What ethical issues might be related to eliminating some of the non-value-added activities?
Castner has a responsibility to those employees that have devoted their careers to the company. The company also has an ethical responsibility to its shareholders and should make ethical decisions when maximizing the shareholder’s wealth. The management can thus try to find new positions for these employees before laying them off.
