Question

Exercise 12.12 (Algorithmic)
Value-Added and Non-Value-Added Costs, Unused Capacity

For Situations 1 through 6, provide the following information:

An estimate of the non-value-added cost caused by each activity. If required, round your final answer to the nearest dollar.

The root causes of the activity cost (such as plant layout, process design, and product design).

The appropriate cost reduction measure: activity elimination, activity reduction, activity sharing, or activity selection.

Choose " Multiple" in the Root cause column, wherever there is more than one root cause.

It takes 48 minutes and six pounds of material to produce a product using a traditional manufacturing process. A process reengineering study provided a new manufacturing process design (using existing technology) that would take 18 minutes and 4 pounds of material. The cost per labor hour is $14, and the cost per pound of material is $10.

With its original design, a product requires 12 hours of setup time. Redesigning the product could reduce the setup time to an absolute minimum of 24 minutes. The cost per hour of setup time is $100.

A product currently requires eight moves. By redesigning the manufacturing layout, the number of moves can be reduced from eight to zero. The cost per move is $13.

Inspection time for a plant is 11,000 hours per year. The cost of inspection consists of salaries of four inspectors, totaling $130,000. Inspection also uses supplies costing $18 per inspection hour. A supplier evaluation program, product redesign, and process redesign reduced the need for inspection by creating a zero-defect environment.

Each unit of a product requires thirteen components. The average number of components is 13.3 due to component failure, requiring rework and extra components. By developing relations with the right suppliers and increasing the quality of the purchased component, the average number of components can be reduced to 13 components per unit. The cost per component is $800.

A plant produces 1,000 different electronic products. Each product requires an average of 26 components that are purchased externally. The components are different for each part. By redesigning the products, it is possible to produce the 1,000 products so that they all have 13 components in common. This will reduce the demand for purchasing, receiving, and paying bills. Estimated savings from the reduced demand are $370,000 per year.

Case	Non-Value-Added Cost		Root Cause	Cost Reduction
1	$	per unit	- Select your answer -MultiplePlant layoutProcess designProduct designSuppliersItem 2	- Select your answer -Activity eliminationActivity reductionActivity selectionActivity sharingItem 3
2	$	per setup	- Select your answer -MultiplePlant layoutProcess designProduct designSuppliersItem 5	- Select your answer -Activity eliminationActivity reductionActivity selectionActivity sharingItem 6
3	$	per unit	- Select your answer -MultiplePlant layoutProcess designProduct designSuppliersItem 8	- Select your answer -Activity eliminationActivity reductionActivity selectionActivity sharingItem 9
4	$	per year	- Select your answer -MultiplePlant layoutProcess designProduct designSuppliersItem 11	- Select your answer -Activity eliminationActivity reductionActivity selectionActivity sharingItem 12
5	$	per unit	- Select your answer -MultiplePlant layoutProcess designProduct designSuppliersItem 14	- Select your answer -Activity eliminationActivity reductionActivity selectionActivity sharingItem 15
6	$	per year	- Select your answer -MultiplePlant layoutProcess designProduct designSuppliersItem 17	- Select your answer -Activity eliminationActivity reductionActivity selectionActivity sharingItem 18

Answer 1

The answer is as follows:

Case	Non-Value-Added Cost		Root Cause	Cost Reduction
1	$ 27	per unit	Process Design	Activity reduction
2	$ 1160	per setup	product design	activity reduction
3	$ 104	per unit	plant layout	activity elimination
4	$ 328,000	per year	Multiple	activity elimination
5	$ 240	per unit	Multiple	activity selection
6	$ 370,000	per year	product design	activity sharing

Detailed Calculation is as follows:

1

Traditional

New Mfg

Savings

Rate $

Amount of Savings $

Root cause

Cost Reduction measure

Minutes

Material pounds

Minutes

Material pounds

Minutes

Material pounds

Per Hour

Per Pound

Minutes

Material pounds

Total

48

6

18

4

30

2

14

10

7

20

27

Process Design

Activity reduction

2

Set up time in Hours

Set up time in Hours (New)

Savings in hours

Rate per hour

Amount of Savings $

Root cause

Cost Reduction measure

12

0.4

11.6

100

1160

product design

activity reduction

3

Number of moves

Number of moves (New)

Savings in moves

Cost per move

Amount of Savings $

Root cause

Cost Reduction measure

8

0

8

13

104

plant layout

activity elimination

4

Inspection

Inspection New

Savings

Rate

Amount of Savings $

Employees

Time

Employees

Time

Employees

Time

Employees

Time

Salary

Time

Total

Root cause

Cost Reduction measure

4

11000

0

0

4

11000

NA

18

130000

198000

328000

Multiple

activity elimination

5

Components

Components (New)

Savings

Rate

Amount of Savings $

Root cause

Cost Reduction measure

13.3

13

0.3

800

240

Multiple

activity selection

6

Components

Components (New)

Savings

Rate

Amount of Savings $

Root cause

Cost Reduction measure

NA

NA

NA

NA

370000

product design

activity sharing