Question

Value-Stream Average Costing, ABC Costs as Benchmarks A value stream has three activities and two products. The units produced and shipped per week are 50 of the deluxe model (Model A) and 150 of the basic model (Model B). The resource consumption patterns are shown as follows: Model A Model B Costs of Value- Stream Activities Cell manufacturing 2,400 min. 7,200 min. $ 76,800 Engineering 60 hrs. 260 hrs. 27,200 Testing 100 hrs. 220 hrs. 24,000 Total $ 128,000 Required: 1. Calculate the ABC product cost for Models A and B. Round your answers to the nearest cent if rounding is required. Product Cost Per Unit Model A $ per unit Model B $ per unit 2a. Calculate the value-stream average product cost. $ per unit 2b. Assuming reasonable stability in the consumption patterns of the products and product mix, assess how well the products are grouped based on similarity. The two value-stream products are similar Check My Work

Answer 1

1

Calculate the ABC product cost for Models A and B

First of all we need calculate activity rates as under

: Cell manufacturing:

Driver is conversion time (in minutes)

=$76,800/(2,400 + 7,200)

= $8 per minute

Engineering: Driver is engineering hours

=$27,200/(60 + 260)

= $85 per engineering hour

Testing: Driver is testing hours:

=$24,000/(100 + 220)

= $75 per test hour

Now calculate product costs as under

	ModelA	Model-B
Cell
8x2400	19200
8x7200		57600
Engineering
85x60	5100
85x260		22100
Testing
75x100	7500
75x220		16500
Total	31800	96200
Devided by
Units	50	150
Unit cost (Cost/Units)	636	641.33

________________________________________________

2-a

Average cost

= $128,000/200

= $640

.

The average cost approximates the ABC costs with very little error, suggesting that the two value-stream products are quite similar. Alternatively, the ABC cost is about the same for each model, suggesting significant homogeneity and thus the correct specification of the value stream