Chapter 12, Problem 1CE

Cicleta Manufacturing has four activities: receiving materials, assembly, expediting products, and storing goods. Receiving and assembly are necessary activities; expediting and storing goods are unnecessary. The following data pertain to the four activities for the year ending 20x1 (actual price per unit of the activity driver is assumed to be equal to the standard price):

Required:

1. 1. Prepare a cost report for the year ending 20x1 that shows value-added costs, non-value-added costs, and total costs for each activity.
2. 2. Explain why expediting products and storing goods are non-value-added activities.
3. 3. What if receiving cost is a step-fixed cost with each step being 1,500 orders whereas assembly cost is a variable cost? What is the implication for reducing the cost of waste for each activity?

To determine

Construct a cost report for C Company showing the value-added, non-value cost and total cost of each activity.

Explanation of Solution

Value-added cost: A value added cost is the cost incurred by the business to perform the value added activities in order to achieve optimum efficiency in their operations. Value-added costs are calculated using the following formula.

$\begin{array}{l}\text{Value-added cost}\text{=}\text{Standard Quantity}\left(\text{SQ}\right)\times \text{Standard price}\left(\text{SP}\right)\\ \\ \text{where;}\\ \text{SQ}\text{=}\text{Standard Quantity}\\ \text{SP}\text{=}\text{Standard Price}\end{array}$

Non-value added cost: A non-value added cost is the cost incurred by a business on non-value added activities that adds to the total cost of the business but does not contribute to the required efficiency. Non-value-added costs are calculated using the following formula.

$\begin{array}{l}\text{Non-value-added cost}\text{=}\left(\text{AQ}-\text{SQ}\right)\times \text{SP}\\ \\ \begin{array}{l}\text{Where;}\hfill \\ \hfill \\ \begin{array}{l}\text{SQ = Standard Quantity}\\ \text{SP = Standard Price}\\ \text{AQ}\text{=}\text{Actual Quantity}\end{array}\hfill \\ \hfill \\ \hfill \end{array}\end{array}$

Prepare a cost report of C Company showing the value-added, non-value added and total cost of each activity of C Company.

Value and non-value added
Cost report of C Company
Activity	Value-Added cost ($)	Non-value Added cost ($)	Total Cost ($)
Receiving	252,000 (1)	126,000(3)	378,000(7)
Assembly	1,125,000(2)	225,000(4)	1,350,000(8)
Expediting	0	300,000(5)	300,000(9)
Storing	0	84,000(6)	84,000(10)
Total	1,377,000	735,000	2,112,000

Table (1)

Working notes:

(1) Compute the value-added cost of receiving activity of C Company.

$\begin{array}{c}\text{Value-added activity}\text{=}\text{Standard quantity}\left(\text{SQ}\right)\times \text{Standard price}\left(\text{SP}\right)\\ \text{=}\text{12,000}\times \text{\$21}\\ \text{=}\$252,000\end{array}$

(2) Compute the value-added cost of assembly activity of C Company.

$\begin{array}{c}\text{Value-added activity}\text{=}\text{Standard quantity}\left(\text{SQ}\right)\times \text{Standard price}\left(\text{SP}\right)\\ \text{=}75\text{,000}\times \text{\$15}\\ \text{=}\$1,125,000\end{array}$

(3) Compute the non-value-added cost of receiving activity of C Company.

$\begin{array}{c}\text{Non-value-added cost}\text{=}\left(\text{AQ}-\text{SQ}\right)\times \text{SP}\\ =\left(18,000-12,000\right)\times \$21\\ =\left(6,000\right)\times \$21\\ =\$126,000\end{array}$

(4) Compute the non-value-added cost of assembling activity of C Company.

$\begin{array}{c}\text{Non-value-added cost}\text{=}\left(\text{AQ}-\text{SQ}\right)\times \text{SP}\\ =\left(90,000-75,000\right)\times \$15\\ =\left(15,000\right)\times \$15\\ =\$225,000\end{array}$

(5) Compute the non-value-added cost of expediting activity of C Company.

$\begin{array}{c}\text{Non-value-added cost}\text{=}\left(\text{AQ}-\text{SQ}\right)\times \text{SP}\\ =\left(6,000-0\right)\times \$50\\ =\$300,000\end{array}$

(6) Compute the non-value-added cost of storing activity of C Company.

$\begin{array}{c}\text{Non-value-added cost}\text{=}\left(\text{AQ}-\text{SQ}\right)\times \text{SP}\\ =\left(12,000-0\right)\times \$7\\ =\$84,000\end{array}$

(7) Compute the total cost of receiving activity of C Company.

$\begin{array}{c}\text{Total cost}\text{=}\text{Value added cost}\text{+}\text{Non-value added cost}\\ \text{=}\$252,000+\$126,000\\ \text{=}\$378,000\end{array}$

(8) Compute the total cost of assembling activity of C Company.

$\begin{array}{c}\text{Total cost}\text{=}\text{Value added cost}\text{+}\text{Non-value added cost}\\ \text{=}\$1,125,000+\$225,000\\ \text{=}\$1,350,000\end{array}$

(9) Compute the total cost of expediting activity of C Company.

$\begin{array}{c}\text{Total cost}\text{=}\text{Value added cost}\text{+}\text{Non-value added cost}\\ \text{=}\$0+\$300,000\\ \text{=}\$300,000\end{array}$

(10) Compute the total cost of storing activity of C Company.

$\begin{array}{c}\text{Total cost}\text{=}\text{Value added cost}\text{+}\text{Non-value added cost}\\ \text{=}\$0+\$84,000\\ \text{=}\$84,000\end{array}$

To determine

Give reasons for the activity of expediting products and storing goods being catagorized as non-value added activities.

Explanation of Solution

Both expediting aand storing activities are actually unnecessary activities that consume resource without influencing any change in the quality and customer perspective of the product.

To determine

Explain the implications for reducing the cost of waste for reach activity assuming receiving cost is a step-fixed cost with each step being 1,500 orders and assembly cost is a variable cost.

Explanation of Solution

For receiving activities, cost reduction can only be made when the actual demand for receiving orders is reduced by each block of 1,500 orders. In the case of assembly activities, each hour that is saved produce a saving of $15. As a result, reduction in spending can benefit better for assembly activity than for receiving activity.