Cost Accounting (14th Edition)

PROBLEM FOR SELF-STUDY 453
3. Reduce testing time and the labor and power required per hour of testing.
4. Develop new rework procedures to reduce rework costs per hour.
No changes are proposed in direct manufacturing labor cost per unit and in total machining
costs.
The following table summarizes the cost-driver quantities and the cost per unit of
each cost driver for Provalue III compared with Provalue II.
1
2
3
4
5
6
7
8
9
10
Budgeted
Total
Budgeted
21,250 $ 80 50 orders per
component
Budgeted
Quantity Cost per
Total
Cost Cost
Details of Budgeted of Cost Unit of Details of Budgeted Quantity of
Category Driver Cost Driver Quantities Driver Cost Driver Cost Driver Quantities Cost Driver Driver
(1) (2) (3) (4) (5)=(3)×(4) (6)
(7) (8) (9)= (7)×(8) (10)
1 kit per unit 200,000 unit s 200,000 $385 1 kit per unit 200,000 unit s 200,000 $375
Direct
materials
Direct
manuf.
labor
(DML)
Direct
machining
(fixed)
Ordering
and
receiving
Test and
inspection
Rework
A B C D E F G H I J K L M N
Manufacturing Cost Information
Manufacturing Cost Information
for 200,000 Units of Provalue II for 2012
for 200,000 Units of Provalue III for 2012
No. of
kits
DML
hours
200,000 units
3,000,000 $ 2 14 testinghours
per unit
Machinehours
No. of
orders
400 components
Testinghours
Reworkhours
2.65 DML hours
per unit
50 orders per
component
15 testinghours
per unit
2.5 reworkhours
per
defective
unit
200,000 unit s 530,000 $ 20 2.65 DML
hours
per unit
425 components
6.5% defect
rate
13,000 a defective
units
11
12
13
a 6.5% defect rate × 200,000 units = 13,000 defective units
300,000
$ 38
32,500 $ 40 2.5 reworkhours
per
defective
unit
200,000 unit s 530,000
300,000
20,000
200,000 unit s 2,800,000
6.5% defect
rate
13,000 a defective
units
32,500
Budgeted
Cost per
Unit of
Cost
$ 20
$ 38
$ 60
$ 1.70
$ 32
Will the proposed changes achieve Astel’s targeted reduction of $4 million, or $20 per
unit, in manufacturing costs for Provalue III? Show your computations.
Required
Solution
Exhibit 12-7 presents the manufacturing costs for Provalue III based on the proposed changes.
Manufacturing costs will decline from $108 million, or $540 per unit (Exhibit 12-5), to
$104 million, or $520 per unit (Exhibit 12-7), and will achieve the target reduction of
$4 million, or $20 per unit.