Value-added, non-value-added costs. The Magill Repair Shop repairs and services machine tools. A summary of its costs (by activity) for 2017 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 f. Preventive maintenance of equipment 55,000 g. Breakdown maintenance of equipment 75,000 Required: Classify each cost as value-added, non-value-added, or in the gray area between. 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? 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 servicing 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% 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.

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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Value-added, non-value-added costs. The Magill Repair Shop repairs and services machine tools. A summary of its costs (by activity) for 2017 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
f. Preventive maintenance of equipment	55,000
g. Breakdown maintenance of equipment	75,000

Required:

Classify each cost as value-added, non-value-added, or in the gray area between.
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?
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 servicing 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% 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.

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