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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Requirement 1. Classify each cost as value-added, non-value-added, or in the gray area between.

a.	Materials and labor for servicing machine tools
b.	Rework costs
c.	Expediting costs caused by work delays
d.	Materials-handling costs
e.	Materials-procurement and inspection costs
f.	Preventive maintenance of equipment
g.	Breakdown maintenance of equipment

Requirement 2. For any cost classified in the gray area, assume

96%

is value-added and

is non-value-added. How much of the total of all seven costs is value-added and how much is non-value-added?

Compute the total cost for the value-added and nonvalue-added costs, then compute what percentage of the total is value-added and how much is non-value-added.

		Total percent
	Total cost	of total costs
Value-added			%
Non-value-added			%
Total costs

Requirement 3.

Macallister

is considering the following changes: (a) introducing quality-improvement programs whose net effect will be to reduce rework and expediting costs by

60%

and materials and labor costs for servicing machine tools by

5%;

(b) working with suppliers to reduce materials-procurement and inspection costs by

10%

and materials-handling costs by

30%;

and (c) increasing preventive-maintenance costs by

70%

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.

Begin by calculating the effect of program: (a) introducing quality-improvement programs whose net effect will be to reduce rework and expediting costs by

60%

and materials and labor costs for servicing machine tools by

5%.

(If an input field is not used in the table, leave the input field empty; do not enter a zero. Use parentheses or a minus sign to show a reduction.)

		Value-	Non-value-
Program	added	added	Gray area
(a)	Quality improvement programs to:
	reduce rework costs by 60%
	reduce expediting costs by 60%
	reduce materials and labor costs by 5%
	Total effect

Next, calculate the effect of program: (b) working with suppliers to reduce materials-procurement and inspection costs by

10%

and materials-handling costs by

30%.

(If an input field is not used in the table, leave the input field empty; do not enter a zero. Except for the last row of the table. For amounts in the last row, make sure to enter a "0" for any zero balance. Use parentheses or a minus sign to show a reduction.)

		Value-	Non-value-
Program	added	added	Gray area
(b)	Working with suppliers to:
	reduce materials procurement and inspection costs by 10%
	reduce materials handling costs by 30%
	Total effect
	Transferring gray area costs to value-added and non-value-added
	Effect on value-added and non-value-added costs

Now, calculate the effect of program: (c) increasing preventive-maintenance costs by

70%

to reduce breakdown-maintenance costs by

50%.

		Value-	Non-value-	In the
Program	added	added	gray area
(c)	Maintenance programs to:
	increase preventive maintenance costs by 70%
	decrease breakdown maintenance costs by 50%
	Total effect
	Transferring gray area costs to value-added and non-value-added
	Effect on value-added and non-value-added costs

Finally, calculate the total costs for each program. (If an input field is not used in the table, leave the input field empty; do not enter a zero. Use parentheses or a minus sign to show a reduction.)

		Value-	Non-value-
Program	added	added	Total
	Total effect of all programs
	Total costs for value-added and non-value-added, respectively
	Expected value-added and non-value-added costs as a result of these programs

Comment briefly. (Round the percentages to the nearest whole percent.)

If these programs are implemented in 2020, total costs would		a total of		.
The percentage of non-value-added costs		to		% and value-added costs		to		%.

Data Table
a. Materials and labor for servicing machine tools $ 1,000,000
b. Rework costs
120,000
c. Expediting costs caused by work delays
70,000
d. Materials-handling costs
65,000
e. Materials-procurement and inspection costs
105,000
f. Preventive maintenance of equipment
80,000
g. Breakdown maintenance of equipment
110,000
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