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?
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?
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 3 images
