Cost Accounting (Raiborn and Kinney) SOLMAN Chapter 18 PDF

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Chapter 18Inventory and Production ManagementQUESTIONS The three costs are costs of ordering, purchasing, and carrying inventory. These costs are presented in Exhibit 18-1 with examples. A push system is a production control system in which work centers produce inventory in excess of current needs b...

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Chapter 18 Inventory and Production Management QUESTIONS 1.

The three costs are costs of ordering, purchasing, and carrying inventory. These costs are presented in Exhibit 18-1 with examples.

2.

A push system is a production control system in which work centers produce inventory in excess of current needs because of lead time or economic production/order quantity requirements. A pull system of production control is one in which parts are delivered/produced only as needed by the work center for which they are intended. Theoretically, there are no stockrooms where work centers "push" completed parts in excess of the current needs of recipient work centers. JIT is a pull system.

3.

Companies must be aware of where their products are in their life cycles, because in addition to the sales effects, the life-cycle stage may have a tremendous impact on costs and profits. Managing production activities and costs requires an understanding of product life cycles in order to effectively and efficiently engage in production planning, controlling, problem solving, and performance evaluation.

4.

Target costing is a method of determining an allowable cost of making a product by subtracting desired profit from the estimated selling price. Once a product's total lifecycle costs are projected, they can be compared to the target cost to determine whether adjustments to the product design and manufacturing process are necessary before product engineers release the final design and specifications.

5.

It is in the development stage that the production components and production processes are determined. Accordingly, most of the costs of producing the product are set for the life of the product line during the development stage. Costs are much less subject to influence in later stages of the life cycle.

6. Kaizen costing is an approach to identify ways to incrementally improve production efficiency and reduce the costs of making a product. A major distinction between kaizen costing and target costing is seen in the life-cycle stages in which each is used. Kaizen costing is used to reduce the cost of products in later stages of the product life cycle. Target costing is applied in the product development/design stage. 7.

Primary goals of JIT are * elimination of any process that does not add value to the product;

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* continuous improvement of production efficiency; and * reduction of total cost of production rather than merely the cost of purchasing. JIT attempts to achieve these goals by working to * eliminate the acquisition/production of inventories in excess of current needs; * reduce lead/setup times; and * minimize product defects. 8.

The following changes are needed to effectively implement JIT in a production environment: * Selection of a vendor should include the following items in addition to the invoice prices: consistent quality of materials/parts to minimize product defects; reliable delivery schedules with short lead times to allow for maintaining little or no inventory and for flexibility and speed in setting up production runs; maintaining long-term relationships with fewer vendors to improve communications, ensure quality and service, obtain quantity discounts, and reduce operating costs; obtaining suppliers who are close to the plant to reduce lead times and shipping costs. * Small quantities should be ordered to minimize inventory carrying costs. * Product components and tools should be standardized to lower costs and increase production efficiency. * The number of product components should be minimized to lower costs and increase production efficiency. * Products should be carefully designed to reduce subsequent change orders. * Setup times should be shortened to allow for quicker, more flexible production. * Production workers are used to continually ensure quality control in order to reduce costs and approach zero defects. * The plant layout should be designed in a manner that is conducive to the flow of goods and organization of workers in order to minimize cycle time from material input to finished product. * Employee suggestions for improving production should be sought; these individuals often have a wealth of information that goes untapped. * Utilize multiprocess handling to improve worker flexibility and interest.

9.

In an FMS, each employee is charged with operating or overseeing several machines. Although the automation requires fewer workers than traditional production systems, FMS requires its workers to have more training than those

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in a traditional environment. Also, the employees need to be given the authority and responsibility to make decisions because the environment is too fast paced for people "off the floor" to make certain production decisions. The theory of constraints states that production cannot take place at a rate faster than the slowest machine or person in the process. The theory of constraints can be used in either a manufacturing or service firm to focus management's attention on the elimination of the bottlenecks so that the best use of existing capacity can be made.

11.

Total ordering cost declines as order size increases. Carrying costs increase, in total, as order size increases. At some point the two costs are equal and it is at this point that the EOQ point is located. To the right of this point, total carrying costs exceed total ordering costs.

12.

Pareto inventory analyses requires that all inventory items be placed into one of three classes: A, B, or C. The three categories are distinguished from one another by their cost-to-volume ratio. High-value, low-volume items are placed in the A category; at the other extreme, low-value, high-volume items are placed in the C category. All other items are placed in category B. A red-line system or a two-bin system is frequently used to control inventory levels of C items.

13.

EXERCISES a. Because each student will have a unique answer no solution is provided. b. Because each student will have a unique answer no solution is provided. c. The magnitude of inventory as a percentage of total assets will suggest that inventory management is very important to the success of manufacturing firms.

14.

a. b. c. d. e. f. g. h. i. j. k. l. m. n. o. p. q. r.

O O O N/A (Purch.) N O N/A (Purch.) C O O N C N/A (Purch.) C C C N C

15.

a. As technology changes, the relative costs of ordering and carrying inventory change. The changes mentioned in this scenario would appear to lower the costs of ordering inventory. Consequently, assuming the costs of carrying inventory remain at their original level, the reduction in ordering costs would drive the EOQ quantity down. b. The memo should make the points listed in part (a).

16.

The president should ask for a formal analysis of the situation. This analysis should address the costs and benefits of each alternative. Costs should include purchase prices, warehousing costs (including insurance), personnel to operate the warehouse and receive any necessary inventories during the period, the cost of capital on the funds tied up in the parts, and penalties for canceling. The supply director should comply with the president's request by preparing and presenting an objective report. Often, when confronted by situations such as this one, the only costs that are considered are the direct costs (purchase price and penalties).

Decision making of this nature should be careful to reflect not only the directly visible costs but also the "hidden costs" of purchase arrangements. 17. a. Restaurants that manage their food production on a push basis, anticipate the level of demand and prepare food before customers arrive and order. Restaurants that manage their food production on a pull basis, do not produce any food until the customer orders. b. Customers may prefer to dine at a restaurant that manages food production on a push basis if they are time constrained. Because the food has already been produced before the customer arrives, the food can be served very quickly. An illustration would be a restaurant that provides a buffet. c. If quality and freshness are important to the customer, food prepared on a pull basis will be preferred by the customer. Also, if a customer wants food prepared to meet a dietary restriction, e.g., no salt, the customer will prefer that the food production be pull based. 18.

There are situations in which JIT will not readily work. For example, if vendors are unwilling to deliver inputs on a JIT basis, adopting JIT is not possible. Also, some products such as those that are not available from repetitive manufacturing processes are not suitable for JIT. For example, bridges, office buildings and other one-off types of products are not suitable candidates for JIT manufacturing. Other instances in which JIT is not suitable include production environments in which demand is very seasonal. In such environments it may be more economical to produce at a balanced level on a year-around basis rather than produce only seasonally.

19. The essence of the rebuttal would be that the profitability of the product recently introduced by 3G would vary with the product life cycle. Further, because sales volume of the product is likely to be low in the year the product is introduced, the first-year losses are not unexpected. One should argue that the product should be dropped only if the total future life cycle sales are expected to produce a loss rather than a profit. 20.

Ames is correct. Relative to products with long life cycles, there is less opportunity to make post-development changes to production processes for products with short life cycles to improve profitability. In general, the longer the life cycle, the more opportunity there is to use kaizen techniques to improve efficiency. For products with short life cycles, the bulk of life cycles sales will quickly be in the past rather than in the future.

21.

Life-cycle revenue:

Year 1 38,000 x $19 Year 2 48,000 x 18 Year 3 90,000 x 16 Year 4 40,000 x 12 Total 216,000 Required profit 216,000 × $4.50 Total target cost

$ 722,000 864,000 1,440,000 480,000 3,506,000 (972,000) $2,534,000

Target cost per unit: $2,534,000 ÷ 216,000 = $11.73 22.

a. Life-cycle revenues Year 1 4,000 x $700 Year 2 3,600 x $700 Year 3 4,700 x $700 Year 4 5,000 x $700 Year 5 1,500 x $550 Year 6 1,000 x $550 Totals 19,800 Variable selling costs (19,800 x $160) Fixed selling and administrative Required profit ($13,485,000 x 0.20) Target manufacturing cost Target manufacturing cost per unit

$ 2,800,000 2,520,000 3,290,000 3,500,000 825,000 550,000 13,485,000 (3,168,000) (3,500,000) (2,697,000) $ 4,120,000 $ 208.08

b. Total target manufacturing cost Year 1 mfg. cost (4,000 x $450) Total target manufacturing cost

$ 4,120,000 (1,800,000) $ 2,320,000

Target unit mfg. cost ($2,320,000 ÷ 15,800) $146.84 c. The company’s engineers could redesign the product to make it less costly to produce by reducing both material and conversion costs, or redesign the process to reduce conversion costs. Also, they could use kaizen techniques, which could lower costs after production has started. 23.

The student’s memo should address the following issues: Target cost = $115 - $10 = $105. 1. Given that the target cost is $105 and the anticipated actual firstyear production cost is $120, it is apparent that it will be impossible to realize the required profit of $10 per unit unless changes are made. 2. There are two major courses of action. First, management should ask the product engineers to review product design and specifications with the purpose of reducing expected average total life-cycle cost to the required $105 target cost. Failing success in

this endeavor, management could consider launching the product with the objective of achieving long-term price reductions through kaizen costing techniques. If management is pessimistic about the company’s ability to achieve the required long-term reductions in cost, the plans for the product should be abandoned. 24.

No solution provided.

25.

a. 1. Direct Materials Accounts Payable

64,000 64,000

2. Conversion Costs Various Accounts

128,000

3. Work in Process Direct Materials Conversion Costs

192,000

Finished Goods Inventory Work in Process 4. Accounts Receivable Sales Cost of Goods Sold Finished Goods b. 1. Cost of Goods Sold Various accounts

128,000 64,000 128,000 192,000 192,000 316,000 316,000 189,600 189,600 189,600 189,600

2. no entry 3. Finished Goods Inventory Cost of Goods Sold 26.

a. Raw and In Process Inventory Accounts payable

2,400 2,400 322,000 322,000

Conversion costs Various accounts

648,000

Raw and In Process Inventory Conversion costs

640,000

Finished Goods Inventory Raw and In Process Inventory

960,000

Cost of Goods Sold Finished Goods Inventory

954,000

Cost of Goods Sold Conversion costs

648,000 640,000 960,000 954,000 8,000 8,000

Accounts receivable Sales

1,590,000 1,590,000

Alternatively, the following journal entries could be used: Raw and In Process Inventory Finished Goods Inventory Cost of Goods Sold Accounts payable Conversion costs Accounts receivable Sales b.

2,000 6,000 962,000 322,000 648,000 1,590,000 1,590,000

Raw and In Process 322,000 640,000 Bal

Finished Goods

960,000

2,000

960,000 Bal

Cost of Goods Sold

954,000

6,000 Conversion Costs

954,000 8,000

648,000

Bal 962,000

Bal

Accounts payable

640,000 8,000

0 Various accounts

322,000 Sales 1,590,000

648,000 Accounts receivable 1,590,000

c. The remaining balance in Raw and In Process Inventory = $322,000 - $320,000 = $2,000. The remaining balance in Finished Goods = ($2 + 4) x 1,000 = $6,000 27.

a. Material usage variance: Actual cost of materials this month: (A) 11,000 lbs. x $2.25 per lb. = (B) 10,000 lbs. x $3.40 per lb. = Current materials standard: (A) 3,000 x 2 x $2.25 per lb. = (B) 3,000 x 5 x $3.40 per lb. = Material usage variance Annual materials standard:

$24,750 34,000 $13,500 51,000

$58,750

64,500 $ 5,750 F

(A) 3,000 x 3 x $2.25 per lb. = (B) 3,000 x 4 x $3.40 per lb. = Current standard ECO variance

$20,250 40,800

$61,050 64,500 $ 3,450 U

b. The effect of the engineering change was to change the mix of material inputs by decreasing the proportion of the less expensive material, A. For July, this engineering change generated extra costs of $3,450. 28.

a.

SP x AQ $0.01 x 184,000 = $1,840 $0.05 x 31,000 = 1,550 $3,390

SP x SQ $0.01 x 176,000 = $1,760 $0.05 x 32,000 = 1,600 $3,360 $30 U

Material Usage Variance (Material X, $80 U; Material Y, $50 F) b. Current SP x SQ $0.01 x 176,000 = $1,760 $0.05 x 32,000 = 1,600 $3,360

Annual SP x SQ $0.01 x 256,000 = $2,560 $0.05 x 16,000 = 800 $3,360 $0

ECO Variance (Material X, $800 F; Material Y, $800 U) c. The company was fairly effective in managing costs. The engineering change variance had no effect on costs, but relative to the current standard, actual usage slightly exceeded the standard. d. The company would make a change that was cost neutral, if the quality of the product would be improved. Thus, for no increase in cost, a higher quality product is obtained, which could result in greater revenues. 29.

JIT requires close relations and communications with suppliers. Preferably, there should be a few, well-cultivated suppliers who are "trained" to know precisely your inventory needs and who understand the critical requirement of meeting your just-in-time operation schedule. Further, they should be made aware that they will be dismissed for defective or inappropriate products or service or for failure to meet delivery schedules. All of the above requires continual close communications between the vendor and the JIT producer. In this case, William Manufacturing needs to consider whether some or all of the responsibility rests with the company itself. Have the vendors been

properly "trained" and made precisely aware of product and timing needs? Have the vendors been chosen with the expertise, facilities and delivery capability to service William's requirements? Do William's personnel know exactly what the needs are, and are those needs fairly stable? If, for example, William has frequent engineering changes because of inadequate product development, supplier compliance is hampered. Finally, JIT systems cannot be fully and effectively implemented in a few months. It usually takes considerably longer to make the system work well. Expectations that JIT can have immediate perfect results are likely to lead to disappointment. 30.

No solution provided.

31. a. The adoption of a FMS should reduce inventories of material, work in process and finished goods. Because a FMS allows the manufacturer to switch production among products quickly, production runs can be shorter. Shorter production runs support lower levels of finished goods and work in process inventories. In turn, shorter production runs allow lower levels of materials to be maintained. b. The FMS should allow production employment levels to drop. With a FMS, most production activities are performed by machine and the role of production employees is to operate/monitor the machines. Also, the production layout for a typical FMS allows one employee to operate multiple machines. Accordingly, relative to a traditional production system, a FMS should require a lower number of production employees. c. Employees would require retraining. In a traditional production system, employees typically perform manual conversion operations or operate a single machine. The machines in a FMS are computer controlled and one employee typically operates several machines. Thus, the method of operating the machines and the number of machines operated by a single employee differ significantly between traditional and FMS production. Accordingly, existing employees would need substantial training to function in a FMS environment. 32.

The first consideration would be to keep the two remaining polishing machines operating at peak efficiency. To do so would require that all flatware entering the polishing operation be defect free. Thus, one would want to be certain that there is a quality inspection that immediately precedes the polishing operation. Further, one would want to recommend that the two remaining machines be properly maintained so that no additional breakdowns will occur while the third machine is being repaired. To gain additional capacity, one could rent a machine from a vendor, or outsource some of the polishing to an outside firm.

33.

No, Office Provisions did not complete the 180 units by 5:00 PM.

Dept. 1 Dept. 2 Dept. 2 Backlog Cumulative Dept. 2 Backlog

Time of Afternoon 1-2 2-3 3-4 44 40 49 44 40 45

Output 4-5 Total 47 180 45 174

0

0

4

2

0

0

4

6

6*

* The robot can be counted on to finish 45 units per hour. Although Dept. 1 averaged 45 units per hour, it was late getting 6 units to...