Deck 19: Costing and the Value Chain

Question 1

Identify a restaurant where you have dined. Identify some of the types of costs that the restaurant incurs in each of the four cost-of-quality categories. Consider how those costs are related to each other.

Answer 1

1. Prevention-training chefs and wait staff.
2. Appraisal-quality control checking of purchased produce and meats.
3. Internal failure-ruined meal because of spoiled produce.
4. External failure-meal returned by customer.

Question 2

Activity-Based Management Cost Savings
An activity analysis at Sky High Pie Company found the following activities for its pie makers: 25 percent of time, adding ingredients; 50 percent of time, mixing and kneading pie dough; 7 percent of time, shaping into pans; and 18 percent of time, cleaning up. The total salary and benefits cost pool for pie makers is $850,000 per year. Sky High Pie is considering buying new equipment that would reduce the time required to mix and knead by 50 percent. What is the potential savings to Sky High Pie per year if it acquires the new equipment? What other value chain and quality issues, besides cost savings, should be considered?

Answer 2

Determine the potential savings to SHP per year if it acquires the new equipment:
The potential cost savings can be determined with the time savings with the new mix and the knead time. The time savings with the new mix and the knead time is determined by
Time savings with new mix and knead time = Savings % × Activity %
= 50% × 75%
= 37.5%.
Now determine the potential cost savings with the new mix and the knead time by multiplying the new mix with the total salary and benefits as below:
Cost savings with new mix and knead time = $850,000 × 37.5%
=$318,750.
Hence, the potential cost savings are $318,750.
Other chain and quality issues:
The other chain and quality issues include the following:
(a) The impact on the quality of the new mixing machines on the quality of their product should be considered.
(b) The customers preference on the texture and flavour of hand mixed and Kneaded loaves will adversely impact the sales by the new equipment.

Question 3

List and describe the four components of the cost of quality and provide examples of each.

Answer 3

Four components of the Cost of Quality:
(1) Prevention Costs: Prevention costs refer to the cost of resources consumed in activities that prevent defects from occurring.
Examples : Employee training, quality process audits, quality concern issues embedded in target costing processes for new products, and supplier quality evaluations (ISO 9000).
(2) Appraisal Costs: Appraisal costs are incurred to determine whether products conform to quality standards.
Examples: Inspection of incoming supplies and materials, in-process inventories, and finished goods; inspection and monitoring of production processes; and inspection of testing equipment to ensure quality.
(3) Internal failure costs: Internal failure costs include additional production-related costs incurred to correct low-quality output.
Examples: rework, downtime, engineering change orders, scrap, retesting, and re inspection.
(4) External failure costs: External failure costs are the largest and most difficult to measure. These costs are incurred because quality failures are allowed to enter the market.
Examples: lost sales, costs due to returns and allowances, warranty costs, product liability costs, and lost good will.

Question 4

Manufacturing Engineering, Inc., is a leading provider of lean manufacturing solutions. Its Web site is at the following address:
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:
Instructions
a. What part of the value chain is targeted by the sample project?
b. What benefits can be identified from the project?
c. 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?

Question 5

Why is target costing most effectively applied at the researeh and development and production process design stage of the value chain?

Question 6

Dust Buster's Inc. manufactures two types of small hand-operated vacuum cleaners. Dust Busters is concerned about quality issues and has compiled the following information for the past year associated with the two vacuums.
Find the quality cost per unit for each product. (Round your answer to two decimal places.) Which product has higher quality costs? How might a manager use this quality information to make decisions (e.g., about the production process or about suppliers) related to the value chain?

Question 7

What activities would make up the marketing and distribution component of the value chain of a local fire department.

Question 8

Just-in-Time Manufacturing
Carts 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:

a. Which of the above activities are value-added?
b. What is Carts' total cycle time?
c. Determine Carts' manufacturing efficiency ratio.
d. If Carts 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 Carts' manufacturing efficiency ratio?

Question 9

What is life-cycle costing and why should it be used in the target costing process?

Question 10

Dainty Diners. Inc., produces various types of bird feeders. The following is a detailed description of the steps involved in the production of wooden bird feeders:
1. Raw materials, such as wood, nails, and clear plastic are purchased.
2. The raw materials are unloaded from the delivery truck into a raw materials storage area.
3. The purchase order is checked for accuracy by an employee doing a visual count of the items.
4. The materials are inspected for defects such as rotting, excessive knots, and scratches.
5. The Cutting Department orders raw materials by sending a requisition form to the raw materials storage area.
6. When a requisition is received, raw materials are moved from the storage area to the Cutting Department.
7. The wood and plastic are cut into properly sized pieces.
8. The cut pieces are stacked and moved to a work in process warehouse.
9. The Assembly Department orders cut pieces when they are needed by sending a requisition form to the work in process warehouse.
10. When a requisition is received, cut pieces are moved from the work in process warehouse to the Assembly Department.
11. The cut pieces are assembled into a bird feeder.
a. For each of the above steps, indicate whether it is a value-added or non-value-added activity.
b. For each of the non-value-added activities, determine whether it can be eliminated; if it cannot be eliminated, suggest ways in which the costs could be minimized or productive efficiency increased.

Question 11

At the beginning of Year 1, Kare Company initiated a quality improvement program. Considerable effort was expended over two years to reduce the number of defective units produced. By the end of the second year, reports from the production manager revealed that scrap and rework had both decreased. The president of the company was pleased to hear of the success but wanted some assessment of the financial impact of the improvements. To make this assessment, the following financial data were collected for the two years.
Instructions
a. Classify the costs as prevention, appraisal, and internal and external failure.
b. Compute total quality cost as a percentage of sales for each of the two years. By how much has profit increased because of quality improvements between Year 1 and Year 2?
c. Graph the prevention and appraisal costs versus the internal and external failure costs for Year 1 and Year 2.
d. Several individuals are critical of the cost-benefit quality model. Identify and explain at least two criticisms. Identify measures, other than cost numbers, that companies can use to track quality.

Question 12

The following information is related to manufacturing office furniture at Outreach. Inc.:
a. Accept and arrange raw materials in inventory-l day.
b. Store raw materials in inventory-5 days.
c. Issue raw materials to various points in the production process-1 day.
d. Use raw materials to manufacture finished goods-3 days.
e. Store finished goods-8 days.
f. Prepare finished goods for shipping-1 day.
Compute the manufacturing efficiency ratio at Outreach.

Question 13

SailRight Boat Company builds and sells small sailboats. Identify at least four specific components of SailRight's value chain. For each component describe what activities might take place in that part of the value chain.

Question 14

Meiger Mining, Inc., has just discovered two new mining sites for iron ore. Geologists and engineers have come up with the estimates on the following page regarding costs and ore yields if the mines are opened:
Meiger's owners currently demand a return of 20 percent of the market price of iron ore.
Instructions
a. If the current market price of iron ore is $8 per ton. what is Meiger's target cost per ton?
b. Given the $8 market price, should either of the mines be opened?
c. The engineer working on Site B believes that if a custom conveyor system is installed, the variable extraction cost could be reduced to $3 per ton. The purchase price of the-system is $25,000. but the costs to restore the site will increase to $45,000 if it is installed. Given the current $8 market price, should Meiger install the conveyor and open Site B?

Question 15

Target Costing
Assume you've just started a new business to manufacture Fry-Plate, a new solar-powered cooking pan for camping. Your business analyst tells you that in the long run Fry-Plate will sell for $32.50 because, after a few years pass, similar products will be introduced by your competitors. Assume that, in the long run, you want to earn $4.50 on each unit of Fry-Plate sold. What is the target price? What is the target profit? What is the target cost?

Question 16

Explain why the selection of cost drivers is an important part of identifying non-value-added activities.

Question 17

Dana Martin, president of Mays Electronics, is concerned about the end-of-the-year marketing report. According to Mary O'Brien, marketing manager, a price decrease for the coming year is again needed to maintain the company's market share of integrated circuit boards (CBs). The current selling price of $18 per unit is producing a $2 per-unit profit-half the customary $4 per-unit profit. Foreign competitors keep reducing their prices, and to match their latest reduction, the price must drop from $18 to $14. This price drop would put Mays's price below the cost to produce and sell a CB. How could other firms sell for such a low price?
Determined to find out if there are problems with the company's operations. Dana has decided to hire a consultant to evaluate the way in which the CBs are produced and sold. After two weeks, the consultant has identified the following activities and costs associated with producing 120.000 CBs:
Diodes, resistors, and integrated circuits are inserted manually into the circuit board.
The consultant indicates that some preliminary activity analysis shows that per-unit costs can be reduced by at least $7. The marketing manager indicates that the market share for the CBs could be increased by 50 percent if the price could be reduced to $12.
Instructions
a. For each activity, determine whether it is value-added or non-value-added.
b. If all the non-value-added activities could be eliminated, by how much would the cost per CB decrease? Was the consultant correct in her preliminary cost reduction assessment?
c. Compute the target cost required to maintain Mays's current market share while earning the usual profit of $4 per unit. Also compute the target cost required to expand sales by 50 percent. By how much would the cost per unit need to be reduced to achieve each target?
d. The consultant also revealed the following: switching to automated insertion would save $90,000 of direct labor. $20,000 in rework, and $40,000 in warranty costs. The yearly cost of the necessary machinery would be $50,000. With this additional information, what is the potential cost reduction per unit available? Can Mays achieve the target cost to maintain its current market share?
e. In an effort to reach the target cost, Mays solicited suggestions from customers, suppliers, employees, and other consultants. The following were found to be feasible:
• Mays's production manager believes that the factory can be redesigned so that materials handling costs can be reduced by $100,000-which would in turn result in a $10,000 savings in rework costs. The cost to redesign the factory would be $20,000.
• A supplier suggests leasing a machine that would reduce set-up costs by $80,000. The yearly cost to lease the machine is $15,000.
• A customer. KD. Inc.. proposes setting up a just-in-time delivery system between Mays, KD. and Mays's largest raw materials supplier. This would reduce Mays's storage costs by $45,000. while increasing shipping costs by only $5,000.
• An employee suggests that Mays train all its employees in quality control measures and then offer a bonus for meeting quality targets. An outside consultant estimates that the cost of the training and bonus would be $35,000. In return, inspections could be eliminated and rework, customer complaint costs, and warranty work could be reduced by $120,000,
If all of the above suggestions are implemented, including the automation of the insertion process, would Mays reach the target cost needed to maintain its current market share?

Question 18

Oro Mining, Inc., has just discovered two new mining sites for copper. Geologists and engineers have come up with the following estimates regarding costs and copper yields if the mines are opened:
Ore's owners currently demand a return of 18 percent of the market price of copper.
Instructions
a. If the current market price of copper is $10 per ton. what is Oro's target cost per ton?
b. Given the $10 market price, should either of the mines be opened?
c. The engineer working on Site Z believes that if a custom conveyor system is installed, the variable extraction cost could be reduced to $3.50 per ton. The purchase price of the system is $20,000, but the costs to restore the site will increase to $30,000 if it is installed. Given the current $10 market price, should Oro install the conveyor and open Site Z?

Question 19

What is the objective of activity-based management and how does it differ from activity-based costing?

Question 20

Pizza Pies Limited has the following value chain for its pizzas. Boxes are designed by Shala Designers Inc. and printed and delivered by Rodoes Printing Co. for $.95 per box. The pizzas are made in the stores with fresh ingredients and baked in the ovens for a total cost of $3.80, including labor, ingredients, and overhead. The pizza delivery costs $1.35. Pizza Pies needs to reduce the price of its pizza to $6.50 to meet local demand. However, it desires a 10 percent markup for profit.
a. What is the target cost? By how much will Pizza Pies need to cut costs in order to achieve the target cost?
b. Identify places in the Pizza Pies Limited value chain where possible savings could be achieved to meet the target cost.

Question 21

What are three important criteria for successful business process management?

Question 22

Cost Reduction
Non-Value-Added Activities
Identify a non-value-added activity at a grocery store, a bank, and a hotel. Explain how each organization might be able to eliminate the non-value-added activity identified.

Question 23

Cost of Quality
Charles Berkle is the manager of Nogain Manufacturing and is interested in doing a cost of quality analysis. The following cost and revenue data are available for the most recent year ended December 31:

a. Classify each of the above costs into the four quality cost categories and prepare a cost of quality report for Nogain.
b. What percentage of sales revenue is being spent on prevention and appraisal activities?
c. What percentage of sales revenue is being spent on internal and external failure costs?

Question 24

Some managers believe machine performance is more important in a JIT environment than in a non-JIT environment. Do you agree or disagree? Explain your answer.

Question 25

The following are eight technical accounting terms introduced or emphasized in this chapter:
Each of the following statements may (or may not) describe one of these terms. For each statement, indicate the accounting term described, or answer "none" if the statement does not correctly describe any of these terms.
a. Can be eliminated without changing a product's desirability in the eyes of consumers.
b. The focus of this costing method is to assign manufacturing costs to Final products.
c. The process of determining the least costly combination of resources needed to create a product desired by customers.
d. This method considers all costs borne by the consumer from purchase to disposal of a product.
e. If eliminated, the product's desirability to consumers is decreased.
f. The process of using activity-based costs to help reduce and eliminate non-value-added activities.
g. A method in which a product's selling price is determined by adding a fixed amount to the product's current production cost.
h. An approach that explicitly monitors quality costs and rewards quality-enhancing behavior.
i. An important aspect of this method is the reduction of unnecessary inventories.

Question 26

Section 404 of the Sarbanes-Oxley Act (SOX) is designed to nip accounting problems in the bud, before they can blossom into fraud, by focusing on internal controls: Many companies, in complying with Section 404. have discovered-to their surprise-that reviewing internal controls can in fact result in benefits beyond unmasking accounting problems. For example, Pitney Bowes used the internal audit review process to consolidate four accounts receivable offices into one, saving more than $500,000 in one year alone. Cisco Systems, Inc., which spent $50 million and 240,000 hours complying with SOX, found opportunities to streamline steps for ordering products and services, making it easier for customers to do business with Cisco.
Despite reports such as these of individual companies benefiting by eliminating non-value- added costs as a result of SOX Section 404, most CFOs believe the costs are not worth the benefits to their individual companies.
a. Discuss with your classmates the cost-benefit outcomes of Section 404 of the Sarbanes-Oxley Act. What types of societywide benefits are being overlooked by CFOs?
b. Would those societywide benefits ultimately provide benefits to each individual firm? How?

Question 27

BookWeb, Inc., sells books and software over the Internet. A recent article in a trade journal has caught the attention of management because the company has experienced soaring inventory handling costs. The article notes that similar firms have purchasing, warehousing, and distribution costs that average 13 percent of sales. Thirteen percent is attractive to BookWeb management when compared to its results for the past year, shown in the following table:
Book sales revenue totaled $3,000,000 and software sales revenue totaled $2,600,000. A review of the company's activities found various inefficiencies with respect to the warehousing of books and the outgoing shipments of software. In particular, book misplacements resulted in an ex 'a 550 moves and software had 250 incorrect shipments.
a. What is activity-based management (as opposed to cost-based management, for example) and under what circumstances is it useful? What is a non-value-added activity?
b. How much did non-value-added activities cost BookWeb this past year?
c. Cite at least two examples of situations that may have given rise to non-value-added activities at BookWeb.
d. Will the elimination of non-value-added activities allow BookWeb to achieve 1 3 percent as a cost percentage of sales for each of the product lines? (Show all calculations to support your answer.)
e. Do either of the product lines require additional cost cutting to achieve the target percentage. How much additional cost cutting is needed and what tools for methods) might the com use to achieve the cuts? Briefly describe them.

Question 28

Classify each of the following activities into one of the four cost of quality categories and/or identify it as a value-added or a non-value-added activity.
a. Rework, due to poor materials, on bicycles at Trek.
b. Inspection costs incurred by Wal-Mart on merchandise purchased from Mattel, inc.
c. Costs incurred by Wal-Mart when merchandise, purchased from Grocers, Inc.. spoils.in its warehouse before shipping to its stores.
d. Work in process inventory wait-and-move time between the lathing and finishing stages in a furniture manufacturing facility.
e. Training for line workers on proper operation of equipment.
f. Recording the number of defects produced each month.
g. Offering customer refunds due to defective products.
h. Waste disposal costs at Kimberly-Clark.

Question 29

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:
Instructions
a. Identify Castner's value-added production activities.
b. Identify Castner's non-value-added production activities.
c. Calculate Castner's total cycle time.
d. Determine Castner's manufacturing efficiency ratio.
e. Which of the above activities might be reduced or eliminated if Castner implemented a JIT system?
f. What ethical issues might be related to eliminating some of the non-value-added activities?

Question 30

Distinguish between value-added and non-value-added activities and provide an example of each.

Question 31

Mark each of the following as true or false:
a. Total quality Costs are covered by external failure and appraisal costs.
b. Traditional job order costing systems identify and account for quality costs.
c. A rise in internal failures means higher appraisal costs.
d. Quality can pay for itself.
e. As the amount of rework rises, the internal failure costs rise, but external failure costs should fall.
f. Higher quality often leads to higher productivity.
g. Just-in-time manufacturing typically requires tracking of quality costs.
h. Internal and external failure costs are independent.

Question 32

Why is it so important that target costing procedures focus on the customer?

Question 33

Identifying Value-Added and Non-Value-Added Activities
Quartex 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:

Instructions
a. Identify Quartex's value-added production activities.
b. Identify Quartex's non-value-added production activities.
c. Calculate Quartex's total cycle time.
d. Determine Quartex's manufacturing efficiency ratio.
e. Which of the above activities might be reduced or eliminated if Quartex implemented a JIT system?
f. List some of the positive and negative consequences of eliminating some of the non-value-added activities.

Question 34

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:
It is estimated that the manager of the Accounts Receivable Department spends an equal amount of her time supervising the four main activities. The clerks spend approximately half of their time on billing and recording payments. Their remaining time is divided equally between reporting activities and customer service. The two account specialists spend half of their time on delinquent account activities, and the rest of their time is split equally between financial analysis activities and customer service activities that the clerks are not qualified to perform.
Paypro, Inc., has proposed that it can perform all the activities related to collecting delinquent accounts for a fee of $50,000 per year. The manager of Paypro argues that Blake can save $30,000 because the $80,000 in salaries paid to the specialists who currently handle all delinquent accounts can be eliminated. If the contract is accepted, it is estimated that the manager of the Ac­counts Receivable Department would need to devote a quarter of her time to dealing with Paypro employees.
a. Using the information given, prepare an activity table such as that in Exhibit 19-3 on page 857 to calculate the labor cost for personnel devoted to each of the four main activities of the Accounts Receivable Department.
b. Should Blake accept Paypro's offer to take over its delinquent account activities?

Question 35

Why is the output of a JIT system likely to contain fewer defective units than the output of a traditional manufacturing system?

Question 36

Flip Flop's To Go has gathered the following data on its quality costs for the past two years:
a. Compute the percentage change in the total quality costs from year 1 to year 2.
b. Explain what you think caused the change.

Question 37

Capturing Market Share with Target Prices
Assume Bracy's, a retail establishment, wants to capture a 30 percent share of the evening gown market. In order to capture that share, it has determined that the average price of an evening gown should be $450.00. Bracy's requires a 25 percent markup on all clothing lines. What is the target cost for the average evening gown?

Question 38

Arusetta Inc. produces a popular brand of air conditioner that is backed by a five-year warranty.. In Year l, Arusetta began implementing a total quality management program that has resulted in significant changes in its cost of quality. Listed below is Arusetta's financial information relating to sales and quality for Years I and 2.
Instructions
a. Prepare.a cost of quality report for Arusetta covering Year 1 and Year 2. Your report should divide the above costs into the four categories of quality costs and include total dollar amounts for each category.
b. How have the total amounts of prevention and external failure costs changed over the two years? What are some possible explanations for these changes?
c. At Arusetta, preventive maintenance has a direct effect on the repair costs associated with equipment breakdowns. Did the decrease in repair costs justify the increase in maintenance costs?
d. Why might Arusetta's estimate of lost sales remain the same despite the adoption of the total quality management program?

Question 39

The three activities described below were part of the production process in November at Foundry Bellows. Inc. Describe how each activity creates additional costs and whether it is value-added or non-value-added. If it is non-value-added, identify the associated cost of quality category.
a. The Purchasing Department acquired cheaper materials at a big discount but, in order to get the discount, it had to accept delivery of a six-month supply.
b. When materials were issued to production, they were found to be of low quality and products required extensive rework. As a result, overtime pay was required for 50 employees.
c. The production schedule fell behind because of the additional rework. To meet the production schedule for November, workers were transferred from inspection to direct labor and inspection activities were curtailed.

Question 40

What are the four components of target costing? Why are each of these components important for target costing?

Question 41

Healthy Times produces four types of frozen TV dinners that it sells to supermarkets and independent grocery stores. The company operates from two locations: a manufacturing plant and a refrigerated warehouse located a few blocks away. (Administrative offices are located in the manufacturing plant.)
The types of dinners to be produced each week are scheduled a week in advance, based on customer orders. The number of dinners produced, however, is always the same. The company runs its production facilities at full capacity-20,000 units per day-to minimize fixed manufacturing costs per unit.
Every Friday, local suppliers deliver to Healthy Times's factory the fresh vegetables, chicken, fish, and other ingredients required for the following week's production. (Materials are abundant in the region.) These ingredients then are cut into.meal-sized portions, "fresh frozen" using special equipment, and transported by truck to the refrigerated warehouse. The company maintains an inventory of frozen ingredients equal to approximately two weeks' production.
Every day. ingredients for 20,000 dinners are brought by truck from the warehouse to the factory. All dinners produced in a given production run must be of the same type. However, production workers can make the machinery "set-up" changes necessary to produce a different type of frozen dinner in about 10 minutes.
Monday through Thursday, Healthy Times produces one type of dinner each day. On Friday, it manufactures whatever types of dinners are needed to balance its inventories. Completed frozen dinners are transported back to the refrigerated warehouse on a daily basis.
Frozen dinners are shipped daily from the warehouse to customers. All shipments are sent by independent carriers. Healthy Times usually maintains about a 10-day inventory of frozen dinners in the warehouse. Recently, however, daily sales have been averaging about 2,000 units less than the level of production, and the finished goods inventory has swelled to a 25-day supply.
Marsha Osaka, the controller of Healthy Times, recently read about the JIT inventory system used by Toyota in its Japanese production facilities. She is wondering whether a JIT system might benefit Healthy Times.
Instructions
With a group of students write a report to Marsha Osaka that covers the following issues:
a. In general terms , describe a JIT manufacturing system. Identify the basic goals of a JIT manufacturing system and any basic conditions that must exist for the system to operate efficiently.
b. Identify any non-value-added activities in Healthy Times's operations that might be reduced or eliminated in a JIT system. Also identify specific types of costs that might be reduced or eliminated.
c. Assume that Healthy Times does adopt a JIT manufacturing system. Prepare a description of the company's operations under such a system. (Your description should be consistent with the details provided above.)
d. Explain whether or not you think that a JIT system would work for Healthy Times. Identify any ethical concerns that Osaka should consider and provide specific reasons supporting your conclusion.

Question 42

Nazu. Inc., produces a popular brand of humidifier that is backed by a five-year warranty. In Year 1. Nazu began implementing a total quality management program that has resulted in significant changes in its cost of quality. Listed below is Nazu's financial information relating to sales and quality for the past two years.
Instructions
a. Prepare a cost of quality report for Nazu covering Year 1 and Year 2. Your report should divide the above costs into the four categories of quality costs and include total dollar amounts for each category.
b. How have the total amounts of prevention and external failure costs changed over the two years? What are some possible explanations for these changes?
c. At Nazu, preventive maintenance has a direct effect on the repair costs associated with equipment breakdowns. Did the decrease in repair costs justify the increase in maintenance costs?
d. Why might Nazu's estimate of lost sales remain the same despite the adoption of the total quality management program?

Question 43

Value Chain, Quality, and Efficiency at Kimberly-Clark
In a recent annual report the chief executive officer of Kimberly-Clark outlined his plans as follows:
We have four reportable global business segments: Personal Care, Consumer Tissue, K-C Professional ("KCP") and Health Care...
Key strategies for our segments include:
• We plan to grow our strong positions in Personal Care by leveraging our brands and providing innovations.
• For Consumer Tissue, we seek to bring differentiated, value-added innovations to grow and strengthen our brands while focusing on net realized revenue, improving mix and reducing costs.
• We plan to continue to shift our mix to faster-growing, higher-margin segments within KCP and Health Care, including safety and wiping in KCP and medical devices in Health Care.[*]
Instructions
For each critical area identified by Kimberly-Clark, match the area with one or more of the concepts documented in the learning objectives for this chapter. Use every learning objective at least once. Explain how each concept highlighted in the learning objectives would help Kimberly-Clark with their critical area.

Question 44

Home Depot Non-Value-Added Costs
In the Home Depot financial statements in Appendix A at the end of this textbook, find note 1 to the financial statements. Note 1 summarizes significant accounting policies for Home Depot. Read the section in Note 1 titled " Merchandise Inventories."
a. Identify Home Depot 's definition of "shrink."
b. What are the causes of inventory shrink mentioned by Home Depot ? Classify those causes as value-added or non-value-added.
c. What methods does Home Depot use to measure shrink?
d. How does Home Depot account for shrink?

Question 45

Suppose you are interested in opening up a new restaurant in your area. What specific activities would you undertake in the research and development and design stage of the value chain for the restaurant?

Question 46

Bronigan's, a maker of handheld video games, recently analyzed its manufacturing process to identify value-added and non-value-added activities. Bronigan's found that the total non-value-added manufacturing time associated with producing the average game was 12 hours and the total time to produce the average game was 16 hours. What is the manufacturing efficiency ratio for game production at Bronigan's?

Question 47

Characteristics of Quality
Acme International hired a consulting firm to determine if it had any quality-related problems. The consulting firm spent two months reviewing all production processes at Acme and suggested that Acme buy new equipment to reduce throughput time. Then the consulting firm billed Acme $50,000 for services rendered. Should Acme be happy with the consulting firm's work related to product quality? Why or why not?

Question 48

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:
a. Research and development
b. Production
c. Marketing
d. Customer service

Question 49

Assume you are the manager of the finished goods warehouse of a stereo manufacturer. What costs are being incurred as stereos are stored while awaiting shipment to retail stores?

Question 50

Why is JIT often described as a "philosophy." rather than as an inventory management technique?

Question 51

Kallapur Company manufactures two products: KAP1, which sells for $120; and QUIN, which sells for $220. Estimated cost and production data for the current year are as follows:
In addition, fixed manufacturing overhead is estimated to be $2,000,000 and variable overhead is estimated to equal $3 per direct labor hour. Kallapur desires a 15 percent return on sales for all of its products.
Instructions
a. Calculate the target cost for both KAP1 and QUIN.
b. Estimate the total manufacturing cost per unit of each product.if fixed overhead costs are assigned to products on the basis of estimated production in units. Which of the products is earning the desired return?
c. Recalculate the total manufacturing cost per unit if fixed overhead costs are assigned to products on the basis of direct labor hours. Which of the products is earning the desired return?
d. Based on the confusing results of parts b and c. Kallapur's manager decides to perform an activity analysis of fixed overhead. The results of the analysis are as follows:
Estimate the total manufacturing cost per unit of each product if activity-based costing is used for assigning fixed overhead costs. Under this method, which product is earning the desired return?
e. What proportion of fixed overhead is value-added? In attempting to reach the target cost for QUIN. which activity would you look to improving first and why?
f. Kallapur's production manager believes that design changes would reduce the number of set-ups required for QUIN to 25. Fixed overhead costs for set-ups would remain unchanged. What will be the impact of the design changes on the manufacturing costs of both products? Which of the products will earn the desired return?
g. An alternative to the design change is to purchase a new machine that will reduce the number of set-ups for KAPI to 20 and the number of set-ups for QUIN to 80. The machine will also reduce fixed set-up costs to $200,000. Calculate the manufacturing costs for each product if the machine is purchased. Should QUIN be redesigned or should the machine be purchased? Why?

Question 52

On Point, Inc., is interested in producing and selling a deluxe electric pencil sharpener. Market researeh indicates that customers are willing to pay $40 for such a sharpener and that 20,000 units could be sold each year at this price. The cost to produce the sharpener is currently estimated to be $34.
a. If On Point requires a 20 percent return on sales to undertake production of a product, what is the target cost for the new pencil sharpener?
b. If a competitor sells basically the same sharpener for $36, what would On Point's target cost be to maintain a 20 percent return on sales?
c. At a price of $36, On Point estimates that it can sell 21,000 sharpeners per year. Assuming target costs are reached, would On Point earn more or less profit per year at the $36 selling, price compared to the original estimated selling price of $40?

Question 53

Activity-Based Management at First Bank
TPS Incorporated is using activity-based cost information to determine whether it can save money by reassigning activities in its retail stores. The following information has been gathered for a typical store:

In its activity analysis, TPS found that clerks have about 10 percent idle time while customers are entering and leaving the store. The analysis also showed that clerks would be able to help customers organize their purchases before checking out with a cashier. Furthermore, the analysis suggested that about 5 percent of cashiers' time is spent helping customers organize their purchases before check out begins.
Could TPS reduce the number of cashiers at their stores if the organizing activity were transferred to clerks? What other considerations should TPS investigate before assigning the organizing task to the clerks?

Question 54

Activity-Based Management and Target Costing
Bitmore Company manufactures two products: BIT, which sells for $120; and MORE, which sells for $180. Estimated cost and production data for the current year are as follows:

In addition, fixed manufacturing overhead is estimated to be $2,500,000 and variable overhead is estimated to equal $2.50 per direct labor hour. Bitmore desires a 12 percent return on sales for all of its products.
Instructions
a. Calculate the target cost for both BIT and MORE.
b. Estimate the total manufacturing cost per unit of each product if fixed overhead costs are assigned to products on the basis of estimated production in units. Which of the products is earning the desired return?
c. Recalculate the total manufacturing cost per unit if fixed overhead costs are assigned to products on the basis of direct labor hours. Which of the products is earning the desired return? (Round to the nearest penny.)
d. Given the confusing results of parts b and c, Bitmore's production manager decides to perform an activity analysis of fixed overhead. The results of the analysis are as follows:

Estimate the total manufacturing cost per unit of each product if activity-based costing is used for assigning fixed overhead costs. Under this method, which product is earning the desired return?
e. What proportion of fixed overhead is value-added? In attempting to reach the target cost for MORE, which activity would you look to improving first and why?
f. Bitmore's production manager believes that design changes would reduce the number of setups required for MORE to 75. Fixed overhead costs for set-up would remain unchanged. What will be the impact of the design changes on the manufacturing costs of both products? Which of the products will earn the desired return?
g. An alternative to the design change is to purchase a new machine that will reduce the number of set-ups for BIT to 50 and the number of set-ups for MORE to 140. The machine also will reduce fixed set-up costs to $275,500. Calculate the manufacturing costs for each product if the machine is purchased. Should MORE be redesigned or should the machine be purchased? Why?

Question 55

Home Depot 's Value Chain
Read note 1 in Home Depot 's financial statements in Appendix A at the end of this textbook. With a group of students identified by your instructor, list answers to the following.
Instructions
a. List the specific categories in note 1 (cite the page and section) that discuss parts of its value chain. Use the value chain categories discussed at the beginning of the chapter to organize your answer.
b. Identify information in note 1 that shows management cares about the cost categories discussed in this chapter: non-value-added costs, ABC and ABM, JIT, quality cost, and/or target costing.

Question 56

Team members involved in the target costing process should consider the current and future effects of their proposed solutions to arrive at the proposed target cost. Assume in the Boards and More example illustrated in Exhibit 19-8 that one proposed solution is to acquire new heating and drying equipment for the new paperboard mix. Assume the new equipment has a purchase price of $500,000 and is expected to increase the annual depreciation expense from $100,000 to $150,000 per year. What are the cash flow consequences to paperboard in the current year? In future years?