Required: 1.  Calculate the average unit conversion cost for the two machine parts. 2.  Calculate the conversion cost per unit for each part, using ABC.  Comparing ABC unit cost with the average cost, what would you recommend? 3.  Calculate the conversion cost per unit, using DBC (first calculating the cycle time for each product).  Based on this outcome, what would you recommend to the management of Brasher Company?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Brasher Company is transitioning to a lean manufacturing system and has just finalized two order fulfillment value streams.  One of the value streams has two products, and the other has four products.  The two-product value stream produces precision machine parts and the four-product value stream produces machine tools.  Before moving to the value-stream structure, Brasher had a well-developed ABC system ( one that used all duration drivers) and had experienced good success with the more accurate product costs.  Management wanted to be sure that the average costing  approach of value-stream costing did not produce distorted product costs.  Accordingly, expected weekly activity data were provided for the two-product value-streams to see how well average costing worked; however, management did not want to continue using ABC because if its intense data demands and the cost of updating as changes unfolded due to lean practices.  In the table below, the driver for each activity is a duration driver.  Order processing, for example, uses hours available for processing orders; purchasing uses hours available for processing purchases, etc.

  Conversion  Part M15 Part M78 Total Activity
  Cost (hours used) (hours used) Hour
Order processing 36,000 600 1,800 2,400
Purchasing 72,000 200 300 500
Lathe 108,000 480 320 800
Milling 200,000 800 1,200 2,000
Drilling 144,000 720 1,680 2,400
Assembly 40,000 1,200 800 2,000
Inspection 20,000 800 200 1,000
Shipping 18,000 600 200 800
Invoicing 32,000 700 800 1,500
      Total 670,000 6,100 7,300 13,400

During the week, the machine parts value stream expects to produce and ship 10,000 units of M15 and 30,000 units of M78.  Since materials cost is calculated separately, the main concern is with the unit conversion cost.

Required:

1.  Calculate the average unit conversion cost for the two machine parts.

2.  Calculate the conversion cost per unit for each part, using ABC.  Comparing ABC unit cost with the average cost, what would you recommend?

3.  Calculate the conversion cost per unit, using DBC (first calculating the cycle time for each product).  Based on this outcome, what would you recommend to the management of Brasher Company?

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