Problem 1. Value-added, non-value-added costs. The Magill Repair Shop repairs and services machine tools. A summary of its costs (by activity) for 2013 is as follows:
a. Materials and labor for servicing machine tools $1,100,000
b. Rework costs 90,000
c. Expediting costs caused by work delays 65,000
d. Materials-handling costs 80,000
e. Materials-procurement and inspection costs 45,000
I. Preventive maintenance of equipment 55,000
g. Breakdown maintenance of equipment 75,000
1. Classify each cost as value-added, non-value-added, or in the gray area between.
2. For any cost classified in the gray area, assume 60% is value-added and 40% is non-value-added. How much of the total of all seven costs is value-added and how much is non-value-added?
3. Magill is considering the following changes: (a) introducing quality-improvement programs whose net effect will be to reduce rework and expediting costs by 40% and materials and labor costs for servic¬ing machine tools by 5%; (b) working with suppliers to reduce materials-procurement and inspection costs by 20% and materials-handling costs by 30%; and (c) increasing preventive-maintenance costs by 70°4 to reduce breakdown-maintenance costs by 50%. Calculate the effect of programs (a), (b), and (c) on value-added costs, non-value-added costs, and total costs. Comment briefly.
Problem 2. Target operating income, value-added costs, service company. Calvert Associates prepares architectural drawings to conform to local structural-safety codes. Its income statement for 2013 is as follows:
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Revenues
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$701,250
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Salaries of professional staff (7,50D hours x $52 per hour)
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390,000
|
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Travel
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15,000
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Administrative and support costs
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171,600
|
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Total costs
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576,600
|
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Operating income
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$124,650
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Following is the percentage of time spent by professional staff on various activities:
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Making calculations and preparing drawings for clients
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77%
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Checking calculations and drawings
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3
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Correcting errors found in drawings (not billed to clients)
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8
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Making changes in response to client requests (billed to clients)
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5
|
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Correcting own errors regarding building codes (not billed to clients)
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7
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Total
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100%
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Cost Accounting: A Managerial Emphasis, Fifteenth Edition, by Charles T. Horngren, Srikant M. Dalai, and Madhav V. Rajan. Published by Prentice Hall.