Gurland Valves Company manufactures brass valves that meet precise specification standards. All finished valves are inspected before being packaged and shipped to customers. Rejected valves are returned to the initial production stage to be melted and recast. Such rework requires no new materials in casting but requires new materials in finishing.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Gurland Valves Company manufactures brass valves that meet precise specification standards. All
finished valves are inspected before being packaged and shipped to customers. Rejected valves
are returned to the initial production stage to be melted and recast. Such rework requires no new
materials in casting but requires new materials in finishing.
The following unit cost data for direct materials, direct labor, and time-driven activity-based
costing (ABC) are available:
Costs:
- Direct Materials:
- Casting: $225
- Finishing: $12
- Inspection: $0
- Packaging: $8
- Direct Labor:
- Casting: $84
- Finishing: $121
- Inspection: $24
- Packaging: $16
- Support:
- Casting: $122
- Finishing: $164
- Inspection: $30
- Packaging: $20
As a result of a quality improvement program, the reject rate has decreased from 6.4% to 5.1%,
and the number of rejects has decreased by ( 6.4% - 5.1%) x (10,000) units. Improvements in reject
rates have also led to a decrease in work-in-process inventory from $386,000 to $270,000.
Inventory carrying costs are estimated to be 15.0% per year.
Determine the total savings as a result of the quality improvement, assuming that capacity
costs, as indicated by the time-driven ABC support costs, can be reduced if not needed.
Round amounts to the nearest whole dollar.
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