Concept explainers
1.
Construct a cost report for C Company showing the value-added, non-value cost and total cost of each activity
1.
Explanation of Solution
Value-added cost: A value added cost is the cost incurred by the business to perform the value added activities in order to achieve optimum efficiency in their operations. Value-added costs are calculated using the following formula.
Non-value added cost: A non-value added cost is the cost incurred by a business on non-value added activities that adds to the total cost of the business but does not contribute to the required efficiency. Non-value-added costs are calculated using the following formula.
Prepare a cost report of C Company showing the value-added, non-value added and total cost of each activity of C Company.
Cost report of C Company | |||
For the year ended 2014 | |||
Activity |
Value-Added cost ($) |
Non-value Added cost ($) |
Total Cost ($) |
Receiving | 252,000 (1) | 126,000(3) | 378,000(7) |
Assembly | 1,125,000(2) | 225,000(4) | 1,350,000(8) |
Expediting | 0 | 300,000(5) | 300,000(9) |
Storing | 0 | 84,000(6) | 84,000(10) |
Total | 1,377,000 | 735,000 | 2,112,000 |
Table (1)
Working notes:
(1) Compute the value-added cost of receiving activity of C Company.
(2) Compute the value-added cost of assembly activity of C Company.
(3) Compute the non-value-added cost of receiving activity of C Company.
(4) Compute the non-value-added cost of assembling activity of C Company.
(5) Compute the non-value-added cost of expediting activity of C Company.
(6) Compute the non-value-added cost of expediting activity of C Company.
(7) Compute the total cost of receiving activity of C Company.
(8) Compute the total cost of assembling activity of C Company.
(9) Compute the total cost of expediting activity of C Company.
(10) Compute the total cost of storing activity of C Company.
2.
Give reasons for the activity of expediting products and storing goods being catagorized as non-value added activities.
2.
Explanation of Solution
Both expediting aand storing activities are actually unnecessary activities that consume resource without influencing any change of state.
3.
Explain the implications for reducing the cost of waste for reach activity assuming receiving cost is a step-fixed cost with each step being 1,500 orders and assembly cost is a variable cost.
3.
Explanation of Solution
For receiving activities, cost reduction can only be made when the actual demand for receiving orders is reduced by each block of 1,500 orders. In the case of assembly activities, each hour that is saved produce a saving of $15. As a result, reduction in spending can benefit better for assembly activity than for receiving activity.
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Chapter 12 Solutions
EBK CORNERSTONES OF COST MANAGEMENT
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