In: Accounting
Calculation of Value-Added and Non-Value-Added Costs, Activity Volume and Unused Capacity Variances
Maquina Company produces custom-made machine parts. Maquina recently has implemented an activity-based management (ABM) system with the objective of reducing costs. Maquina has begun analyzing each activity to determine ways to increase its efficiency. Setting up equipment was among the first group of activities to be carefully studied. The study revealed that setup hours was a good driver for the activity. During the last year, the company incurred fixed setup costs of $456,300 (salaries of 13 employees). The fixed costs provide a capacity of 30,420 hours (2,340 per employee at practical capacity). The setup activity was viewed as necessary, and the value-added standard was set at 2,340 hours. Actual setup hours used in the most recent period were 28,300.
Required:
1. Calculate the volume and unused capacity variances for the setup activity. Enter all amounts as positive values.
Volume Variance | $ | |
Unused Capacity Variance | $ |
2. Prepare a report that presents value-added, non-value-added, and actual costs for setup.
Maquina Company | |||
Value- and Non-Value-Added Cost Report | |||
Value-Added | Non-Value-Added | Actual | |
Setting up | $ | $ | $ |
Solution:
Given data:
* Fixed Setup cost =4,56,300
*Fixed costs =30,420 hours(2,340 per employee)
=(13 employees *2,340 per employee)
*Value added standard =2,340 hours
*Actual setup hours =28,300
(1)-Computation of volume and unused capacity variances:
1st of all we have to calculate Fixed activity rate:
Formula :
SP = Set up cost / Fixed cost
=4,56,300 / 30,420
=15 per setup hour
Working notes:
* Computation of Volume Variance :
Formula :
Volume variance : SP*SQ – SP*AQ
=15*2,340 -15*30,420
=35,100-4,56,300
=4,21,200(unfavourable)
* Computation of unused capacity Variance :
Formula :
unused capacity Variance : SP*AQ – SP*AV
=15*30,420 – 15*28,300
=4,56,300 – 4,24,500(Favourable)
=31,800(Favourable)
(2) : MARQUINA COMPANY
Value added ,Non-value added &Cost report
Working notes:
*Value added = SP * Value added
=15*2,340
=35,100
*Non-value added =SP * (Fixed cost – Value added)
=15*(30,420-2,340)
=15*28,080
=4,21,200
*Actual Cost = Value added + Non-value added
=35,100 +4,21,200
=4,56,300