Preview only show first 10 pages with watermark. For full document please download

Chapter06.activity-based Management And Cost Management Tools

MAS Test bank by Hilton

   EMBED


Share

Transcript

MULTIPLE CHOICE QUESTIONS 1. Which of the the following following statement statementss is (are) true about about non-value non-value-adde -added d activities? activities? I.Non-value-added activities are often unnecessary and dispensable. II.Non-value-added activities may be necessary but are being performed in an inefficient and improvable manner. III.Non-value-added activities can be eliminated without deterioration of product uality! uality!  performance! or perceived value. value. ". #. $. %. &. I only II only. III only. I and II. I! II! and and III. III. "nswer' & ' * +ype' ,$ . %uring a recent recent accounting accounting period! arty/s shipping department processed 0 orders. &ach order typically taes four hours to complete2 however! the average time increased to five hours because of various departmental inefficiencies. inefficiencies. If shipping labor is paid 314 per hour! hour! the company/s nonvalue-added cost would be' ". 35. #. 360. $. 3*04. %. 31!460. &. 31!75. "nswer' $ ' * +ype' " *. 8tanley 8tanley $orporatio $orporation n taes eight eight hours to complete complete the setup setup process process for a certain electri electrical cal component! with the setup cost averaging averaging 3165 per hour. If the company/s competitor can accomplish the same process in si9 hours! 8tanley/s non-value-added cost would be' ". 35. #. 3165. $. 3*55. %. 3:55. &. 31!55. "nswer' $ ' * +ype' " Chapter 6 139 4. ;actory a a produces produces various various wooden wooden boocases! boocases! tables! storage units! units! and and chairs. chairs. Which of the the following would be included in a listing of the company/s non-value-added activities? ". "sse "ssemb mbly ly of of tabl tables es.. #. 8taini 8taining ng of of stora storage ge units. units. $. +ransfe +ransferr of chairs from the the assembly assembly line to the staining staining facili facility ty.. %. 8torage 8torage of complet completed ed boocase boocasess in inventor inventory y. &. #oth #oth <$< <$< and and <%.< <%.< "nswer' & ' * +ype' N 6. "irstream builds recreational motor homes. "ll of of the following activities add value value to the finished product e9cept' ". instal installat lation ion of carp carpet. et. #. assemb assembly ly of the the frame frame to the the chassis chassis.. $. storage storage of of the the vehicle vehicle in the the sales sales area. %. additi addition on of e9te e9terio riorr lights lights.. &. final final pain paintin ting g and and polis polishin hing. g. "nswer' $ ' * +ype' N 0. In an attemp attemptt to cut cut non-valu non-value-add e-added ed costs! costs! compani companies es may' may' ". reduce reduce the the scope scope of selected selected activities activities.. #. elimin eliminate ate select selected ed acti activit vities ies.. $. combi combine ne sele selecte cted d acti activi vitie ties. s. %. do <"< <"< and and <#< <#< abo above ve.. &. do <"! <"!<< <#!< <#!< and and <$< <$< abov above. e. "nswer' & ' * +ype' ,$ =. $ustomer $ustomer profitab profitabilit ility y analysis analysis is is tied closely closely to' to' ". >ust >ust-i -inn-ti time me syste systems ms.. #. acti activi vity ty-b -bas ased ed costi costing ng.. $. >ob >ob co costin sting. g. %. proc proces esss cost costin ing. g. &. oper operat atio ion n costi costing ng.. "nswer' # ' 4 +ype' ,$ 7. enerally enerally speain speaing! g! companies companies prefer prefer doing business business with with customers customers who' who' ". order small uantiti uantities es rather rather than than large large uantit uantities. ies. #. ofte often n chang changee thei theirr order orders. s. $. reui reuire re specia speciall pacagi pacaging ng or handli handling. ng. %. reues reuestt norma normall deliv delivery ery time times. s. &. need speciali@e speciali@ed d engin engineerin eering g design design changes. changes. "nswer' % ' 4 +ype' ,$ 140 Hilton, Managerial Accounting, Seventh Edition :. Which of the following can have a negative impact on a sale/s profitability? ". Number of reuired sales contacts (phone calls! visits! etc.). #. 8pecial shipping instructions. $. "ccounts receivable collection time. %. Aurchase-order changes. &. "ll of the above. "nswer' & ' 4 +ype' N 10. Horton Corporation's customers difer greatly with respect to number o required sales contacts (e.g., phone calls and sales isits!, account payment patterns, and design"engineering change orders. #hich o the ollowing choices li$ely denotes an ideal customer rom Horton's perspectie% ,euired "ccount %esignB&ngineering 8ales $ontacts Aayment Aatterns $hange rders ". any 8low any #. any ,apid any $. ;ew 8low any %. ;ew ,apid ;ew &. any ,apid ;ew "nswer' % ' 4 +ype' N 11. Which of the following is an appropriate way to analy@e customer profitability? ". +he cost of servicing a customer computed as a percentage of the customer/s gross margin. #. +he cost of servicing a customer computed as a percentage of the customer/s gross margin! compared against company or industry norms. $. +he cost of servicing a customer computed as a percentage of the customer/s gross margin! e9amined over several years. %. $hoices <"< and <#.< &. $hoices <"!< <#!< and <$.< "nswer' & ' 4 +ype' ,$ 1. +he costing techniue that produces a stipulated profit when a product is sold at its estimated maret-driven price is termed' ". ai@en costing. #. product costing. $. target costing. %. full costing. &. strategic costing. "nswer' $ ' 6 +ype' ,$ Chapter 6 141 1*. +he four tass that follow tae place in the concept nown as target costing' 1CDalue engineering. C&stablish a target selling price. *C&stablish a target cost. 4C&stablish a target profit. Which of the following choices correctly depicts the seuence of these tass? ". 1! *! 4! . #. *! 1! 4! . $. ! 4! *! 1. %. ! *! 1! 4. &. 8ome other seuence not listed above. "nswer' $ ' 6 +ype' ,$ 14. f the five tass that follow! which one is typically performed second when using the concept nown as target costing? ". $ompute a target cost. #. %etermine a target selling price. $. $alculate a target profit. %. 8elect a cost driver. &. Endertae value engineering. "nswer' $ ' 6 +ype' ,$ 16. ,obertson! Inc.! uses target costing and sells a product for 3*0 per unit. +he company sees a  profit margin eual to 6F of sales. If the current manufacturing cost is 3: per unit! the firm will need to implement a cost reduction of' ". 35. #. 3. $. 3:. %. 35. &. 3=. "nswer' # ' 6 +ype' " 10. $ollins $orporation uses target costing and sells a product for 365 per unit. +he company sees a  profit margin eual to 45F of sales. If target-costing calculations revealed a need for a 36 cost reduction! the firm/s current manufacturing cost must be' ". 35. #. 36. $. 3*5. %. 3*6. &. some other amount. "nswer' % ' 6 +ype' " 142 Hilton, Managerial Accounting, Seventh Edition 1=. +he process of continual cost reduction during the manufacturing phase of an e9isting product is termed' ". ai@en costing. #. product costing. $. target costing. %. maret costing. &. strategic costing. "nswer' " ' 0 +ype' ,$ 17. Gai@en costing refers to' ". radical cost reductions during the design phase of a product. #. radical cost reductions during the manufacturing phase of a product. $. small! continual cost reductions during the design phase of a product. %. small! continual cost reductions during the manufacturing phase of a product. &. the use of operational costing in out-of-control manufacturing situations. "nswer' % ' 0 +ype' ,$ 1:. Which of the following would least liely be a feature or goal that is associated with a ai@encosting program? ". &limination of waste. #. Ese of overhead application rates. $. Implementation of employee suggestions. %. Improvements in production time. &. ,eduction of non-value-added activities and costs. "nswer' # ' 0 +ype' ,$ 5. +he comparison of a company/s practices and performance levels against those of other organi@ations is most commonly nown as' ". benchmaring. #. continuous improvement. $. re-engineering. %. comparative analysis. &. ai@en business analysis (G#"). "nswer' " ' = +ype' ,$ 1. Which of the following techniues does not logically belong with the others? ". Aroduct costing. #. Dalue engineering. $. Gai@en costing %. $ontinuous improvement. &. #enchmaring. "nswer' " ' 6! 0! = +ype' N Chapter 6 143 . Which of the following statements about re-engineering is (are) true? I.,e-engineering is the complete redesign of a process in an attempt to find creative new ways to accomplish an ob>ective. II.,e-engineering involves more of a ust-in-time production system would attempt to reduce andBor eliminate' ". raw-material inventory. #. raw-material inventory and wor-in-process inventory. $. raw-material inventory! wor-in-process inventory! and finished-goods inventory. %. wor-in-process inventory. &. finished-goods inventory. "nswer' $ ' 7 +ype' ,$ &. #hich o the ollowing inentories would a company try to reduce and"or eliminate under a ust)in)time system% ,aw-aterial Wor-in-Arocess ;inished-oods Inventory Inventory Inventory ". No No Hes #. No Hes No $. Hes No No %. Hes No Hes &. Hes Hes Hes "nswer' & ' 7 +ype' ,$ 144 Hilton, Managerial Accounting, Seventh Edition 0. arion $orporation! which produces uniue office furniture! recently installed a >ust-in-time  production system. +he various steps in the company/s manufacturing process are coordinated by using a philosophy nown as' ". supply pull. #. demand pull. $. supply push. %. demand push. &. none of the above. "nswer' # ' 7 +ype' N =. Which of the following statements regarding the pull method is (are) true? I.oods are produced in each manufacturing stage only as they are needed at the ne9t stage. II.+he pull method greatly reduces wor-in-process inventory. III.+he pull method reduces waiting time and the associated non-value-added cost. ". #. $. %. &. II only. I and II. I and III. II and III. I! II! and III. "nswer' & ' 7 +ype' ,$ 7. In the pull method of coordinating a production process' ". departments early in the production process continually mae components in order to ensure that later departments do not run out. #. nothing is manufactured at a wor center until a need is signaled from a subseuent process. $. wor-in-process inventories are increased throughout the plant. %. production employees never have idle time! resulting in increased efficiency. &. defective products are unction with activity-based costing. #. facilitates uic and ine9pensive setups of machines. $. helps train worers to do a variety of assignments. %. initiates production in a particular wor center. &. measures the correlation between a cost driver and a cost pool. "nswer' % ' 7 +ype' ,$ Chapter 6 145 *5. Which of the following is not a ey feature of a I+ system? ". Aurchases of materials in relatively large amounts (i.e.! lot si@es). #. " smooth! uniform production rate. $. +otal uality control. %. ultisilled worers and fle9ible production facilities. &. " pull approach to coordinating steps in the production process. "nswer' " ' 7 +ype' ,$ *1. Which of the following statements regarding a I+ system is (are) true? I.aterials are purchased and goods are produced only as reuired. II.&mployees are highly silled at single tass in an effort to maintain uality control. III." I+ system is characteri@ed by many small purchases of raw materials. ". #. $. %. &. I only. I and II. I and III. II and III. I! II! and III. "nswer' $ ' 7 +ype' ,$ *. Which of the following statements regarding uality is (are) true for a company that has implemented a I+ system? I.I+ reuires uality production facilities! methods! and employees. II.I+ reuires the acuisition of uality raw materials. III.I+ reuires that long-term contracts be negotiated with uality suppliers. ". #. $. %. &. II only. I and II. I and III. II and III. I! II! and III. "nswer' & ' 7 +ype' ,$ **. " firm that uses a I+ purchasing philosophy probably' ". has many suppliers. #. has e9tensive inspection of purchased items at the receiving point. $. has relatively few suppliers. %. has deliveries of purchased items made in small lot si@es immediately before the goods are needed in production. &. has relatively few suppliers and has deliveries of purchased items made in small lot si@es immediately before the goods are needed in production. "nswer' & ' 7 +ype' ,$ 146 Hilton, Managerial Accounting, Seventh Edition *4. Which of the following statements is (are) true about I+ purchasing as compared with conventional purchasing systems? I.Juality control by the supplier is more crucial. II."dherence to delivery schedules by vendors is more crucial. III.ong-term supplier contracts are common. ". #. $. %. &. I only II only. III only. I and II. I! II! and III. "nswer' & ' 7 +ype' N *6. Which of the following statements about a >ust-in-time (I+) purchasing system is false? ". 8ince there is minimal bacup! companies must acuire uality raw materials. #. ,aw materials are stocpiled to avoid production disruptions. $. In comparison with e9periences under traditional systems! manufacturers normally deal with a reduced number of suppliers. %. 8upplier reliability tends to be more important under a I+ system than under a traditional  purchasing system. &. +he average purchase si@e is smaller with a I+ system than under a traditional purchasing system. "nswer' # ' 7 +ype' ,$ *0. Kudson! Inc.! is considering a change from a traditional purchasing system to a >ust-in-time  purchasing system. What has probably happened to Kudson/s cost per purchase order and inventory unit storage cost to prompt the company to consider such a change? ". Aurchase-order cost is increasing and unit storage cost is increasing. #. Aurchase-order cost is increasing and unit storage cost is decreasing. $. Aurchase-order cost is decreasing and unit storage cost is increasing. %. Aurchase-order cost is decreasing and unit storage cost is decreasing. &. #oth of these costs are relatively stable in amount. "nswer' $ ' 7 +ype' N *=. When a company adopts a >ust-in-time inventory system! it would e9pect' ". higher inventories and less freuent purchases. #. higher inventories and more freuent purchases. $. lower inventories and less freuent purchases. %. lower inventories and more freuent purchases. &. lower inventories and more units purchased on a given order. "nswer' % ' 7 +ype' N Chapter 6 14   *7. When a company adopts a >ust-in-time inventory system! it would e9pect' ". higher inventories and fewer units purchased on a given order. #. higher inventories and more units purchased on a given order. $. lower inventories and fewer units purchased on a given order. %. lower inventories and more units purchased on a given order. &. lower inventories and less freuent purchases. "nswer' $ ' 7 +ype' ,$ *+. oger Corporation recently abandoned its traditional production and inentory system in aor o a ust)in)time system. -he company typically dealt with 0 suppliers and placed 0 orders throughout the year. /ll other things being equal, which o the ollowing choices denotes a li$ely scenario under the ust)in)time system%  Number   Number of  of 8uppliers rders ". *6 55 #. *6 =65 $. 65 465 %. 05 55 &. 05 =65 "nswer' # ' 7 +ype' N 0. Harold Corporation recently abandoned its traditional production and inentory system in aor o a ust)in)time system. -he company typically ordered 00 units o raw material at a time and purchased units that scored a  on a 10)point quality scale, with 10 being ery close to perection. /ll other things being equal, which o the ollowing choices denotes a li$ely scenario under the ust)in)time system% rder  Juality 8i@e Aurchased ". *55 = #. *55 : $. =55 : %. :65 = &. :65 : "nswer' # ' 7 +ype' N 1. #hen a company switches rom a traditional system to a ust)in)time production and inentory system, what oten happens to the quality o raw material purchased and the number o endors that supply the rm% Juality of   Number of  Aurchases 8uppliers ". Increase Increase #. Increase %ecrease $. %ecrease Increase 14! Hilton, Managerial Accounting, Seventh Edition %. &. %ecrease Increase %ecrease ,emain the same "nswer' # ' 7 +ype' ,$ Chapter 6 149 4. Which of the following would not typically be used or encountered by a firm that is in the service industry? ". $ustomer profitability analysis. #. "ctivity-based management. $. Non-value-added activities. %. Dalue-added activities. &. None of the above! as all would typically be used or encountered by a service provider. "nswer' & ' : +ype' ,$ EXERCISES Value-Added and Non-Value-Added Activities 4*. $onsider the nine activities that follow. 1. icrosoft' %eveloping computer coding for a new spreadsheet pacage . eneral ills' Aainting the office of a maintenance supervisor at a plant that produces cereal *. ayo $linic' &9amining a new patient 4. "merican "irlines' +he :5 minutes that a #oeing =6= sits idle on the ground between flights 6. ffice %epot' oving cases of paper from one location to another in the same warehouse 0. ,ole9' "ttaching a watch band to the watchLs face =. Enited 8tates Aostal 8ervice' ,eprocessing mail that had been sorted incorrectly on a malfunctioning sorting machine. 7. ;idelity Investments' $orrecting errors made by company personnel in customer accounts :. arriott' Epgrading the uality of bedding used at hotels in very competitive maretplaces ,euired' $ategori@e each of the activities as either value-added or non-value-added for the companies noted. ' * +ype' N "nswer' 1. . *. 4. 6. 150 Dalue-added Non-value added Dalue-added Non-value-added Non-value-added 0. =. 7. :. Dalue-added Non-value-added Non-value-added Dalue-added Hilton, Managerial Accounting, Seventh Edition Non-Value-Added Activities Custo!e" P"o#ita$ilit% 44. 8wit@er! Inc.! which sells boos to college boostores and individuals! uses activity-based costing and activity-based management. +he following information is available for the company/s three cost pools' "ctivity Incoming receipts Warehousing utgoing shipments $ost%river  Juantity Aercent of $ost%river "ctivity for #oostore +ransactions *!555 5F 75F  Number of  inventory moves 7!555 05 45  Number of  shipments 17!555 *5 =5 $ost %river    Number of   purchase orders Aercent of $ost%river "ctivity for +ransactions to Individuals #oostore sales totaled 37!455!555! and sales to individuals amounted to 3!455!555. $osts for the three activities were' Incoming receipts! 3465!5552 warehousing! 365!5552 and outgoing shipments! 30*5!555. " review of the company/s activities found various inefficiencies with respect to the warehousing of te9tboos (acuired for eventual sale to boostores) and outgoing shipments to individuals. +hese inefficiencies resulted in an e9tra 655 moves and 455 shipments! respectively. ,euired' ". What is a non-value-added activity? #. Kow much did non-value-added activities cost 8wit@er this past year? $. Which of the two maretsCsales to boostores or sales to individualsCresulted in lower overall costs for incoming receipts! warehousing! and outgoing shipments? &valuate these costs in both absolute dollars and as a percentage of sales. In addition! present a possible e9planation for your results. Note' &9clude costs that arose from inefficient operations. ' *! 4 +ype' "! N Chapter 6 151 /nswer2 ". Non-value-added activities can be defined as activities that are either (1) unnecessary and dispensable or () necessary but inefficient and improvable. Aut simply! such activities can  be eliminated without harming overall uality! performance! or perceived value. #. $ost of non-value-added activities' Incoming receipts' 3465!555  *!555 purchase orders M 3165 per purchase order Warehousing' 365!555  7!555 inventory moves M 306 per move utgoing shipments' 30*5!555  17!555 shipments M 3*6 per shipment Warehousing' 655 moves 9 306 utgoing shipments' 455 shipments 9 3*6 +otal 3*!655 14!555 340!655 $. 8ales to boostores produced lower overall costs in both absolute dollars and as a  percentage of sales. " possible e9planation lies in the fact that sales to individuals resulted in the sale of one or two copies per shipment and order. In contrast! boostore sales liely  produced greater revenues and efficiencies because of the large number of te9ts sold per transaction. %river%river$ost-%river  F F Juantity' Juantity' "ctivity Juantity #oostores Individuals #oostores Individuals Incoming receipts *!555 5F 75F 055 !455 Warehousing 7!555 05F 45F 4!*55 *!55 utgoing shipments 17!555 *5F =5F 6!455 1!55  (7!555 moves 9 05F) - 655 (17!555 shipments 9 =5F) - 455 #oostores Incoming receipts' 055 purchase orders 9 3165 !455 purchase orders 9 3165 Warehousing' 4!*55 moves 9 306 *!55 moves 9 306 utgoing shipments' 6!455 shipments 9 3*6 1!55 shipments 9 3*6 +otal cost $ost as a percentage of sales' 3667!655  37!455!555 3::6!555  3!455!555 152 Individuals 3 :5!555 3*05!555 =:!655 57!555 17:!555 3667!655 4=!555 3::6!555 0.06F 41.40F Hilton, Managerial Accounting, Seventh Edition Custo!e" P"o#ita$ilit% Anal%sis 46. $lar $orporation manufactures cooling system components. +he company has gathered the following information about two of its customers' &ngle &uipment and idwest ,efrigeration. 8ales revenue $ost of goods sold eneral selling costs eneral administrative costs &ngle &uipment 316!555 :6!555 *5!555 1!555 idwest ,efrigeration 3164!555 07!555 1!655 16!565 $ost-driver data used by the firm and traceable to &ngle and idwest are' $ustomer "ctivity 8ales activity rder taing 8pecial handling 8pecial shipping $ustomer "ctivity 8ales activity rder taing 8pecial handling 8pecial shipping $ost %river   8ales visits 8ales orders Enits handled 8hipments &ngle &uipment 7 visits 1= orders 055 units 1: shipments ,ate per Enit of $ost %river  3:55 65 *5 055 idwest ,efrigeration 6 visits  orders 665 units *5 shipments ,euired' ". Aerform a customer profitability analysis for $lar. $ompute the gross margin and operating income on transactions related to &ngle &uipment and idwest ,efrigeration. #. $ompute gross margin as a percentage of sales revenue. +hen compute (1) general selling and administrative costs as a percentage of gross margin and () total customer-related costs (i.e.! costs that arise from sales visits! order taing! and special handling and shipping) as a  percentage of gross margin. $. n the basis of your calculations! which of the two customers is ust ended for the company/s three largest customers' Weeend Aro>ect! +ool art! and ;i9-It $ity. ross sales volume' %ollars  Number of orders +ype of order' ,egular ,ush 8ales returns' %ollars  Number of returns +otal customer-related costs Weeend Aro>ect +ool art ;i9-It $ity 3!555!555 65 34!:55!555 1=6 34!055!555 16 45 15 1*6 45 115 16 3155!555 * 346!155 3455!555 5 3:17!555 345!555 7 346=!755 Komestead/s management recently attended a seminar and learned that customers with e9cessive reuests and demands can have a significant! negative impact on corporate profitability. ,euired' ". ;or each of the three chains! compute' 1.+otal customer-related costs as a percentage of gross margin. .+he average order si@e (ignoring sales returns). *.+he ratio of regular orders to rush orders. 4.+he number of sales returns as a percentage of the number of total orders. #. Arepare a brief summary of your findings. 8hould Komestead wor with any of the chains in an effort to improve results? &9plain. ' 4 +ype' "! N Chapter 6 155 /nswer2 ". 1. $ustomer-related costs as a percentage of gross margin' Weeend Aro>ect' 346!155 O Q(3!555!555 - 3155!555) 9 *5FR M 4*F +ool art' 3:17!555 O Q(34!:55!555 - 3455!555) 9 *5FR M 07F ;i9-It $ity' 346=!755 O Q34!055!555 - 345!555) 9 *5FR M *6F #. 156 . "verage order si@e' Weeend Aro>ect' 3!555!555 O 65 orders M 345!555 +ool art' 34!:55!555 O 1=6 orders M 37!555 ;i9-It $ity' 34!055!555 O 16 orders M 3*0!755 *. ,atio of regular orders to rush orders' Weeend Aro>ect' 45'15 M 4'1 +ool art' 1*6'45 M *.*=6'1 ;i9-It $ity' 115'16 M =.**'1 4. Number of sales returns as a percentage of total orders' Weeend Aro>ect' * O 65 M 0F +ool art' 5 O 1=6 M 11.4F ;i9-It $ity' 7 O 16 M 0.4F $ustomer-related costs are driven by events (and costs) directly traceable to clients. In this case! +ool art/s costs as a percentage of gross margin are much higher (07F) than those of Weeend Aro>ect and ;i9-It $ity. +his result is not surprising given that the firm creates a large number of small orders (37!555 vs. 3*0!755 and 345!555) for Komestead to process. In addition! relative to the other two firms! +ool art relies more heavily on rush orders! which liely creates additional cost. ;inally! a number of +ool art/s orders (11.4F) eventually result in sales returns! again creating additional processing e9pense for Komestead. In summary! +ool art seems to be an outlier in relation to Weeend Aro>ect and ;i9It $ity! and management should approach +ool art to see if the firm can change its ways of doing business. Hilton, Managerial Accounting, Seventh Edition Custo!e" Anal%sis 4=. #eaverton anufacturing is a relatively new customer of Ka9ton &nterprises. In the short period that the two companies have done business with each other! Ka9ton has found #eaverton to be! in management/s words! ustified. +he company/s normal profit margin is *5F of selling price. ,euired' ". What is the printer/s target price! target profit! and target cost? #. 8uppose that Dictor/s engineers and cost accountants conclude that the present design of the  printer will result in a unit cost of 315. &9plain the concept of ust-in-time  purchasing system. +he company/s accountant has provided the following figures if the system is adopted' 8ales lost because of out-of-stoc situations will total 6!655 units! with each unit producing  an average profit for the firm of 3*. +he overall inventory will drop by 3=55!555. Navigator can invest these funds elsewhere  and produce a return of 1*F. " leased warehouse (monthly rent of 3*!555) will no longer be needed.  +wo warehouse employees (total annual salary cost of 34*!555) will be transferred  elsewhere in the firm. "nnual property ta9es and insurance are e9pected to fall by 317!:55.  In order to eep valued customers! Navigator will occasionally have to use air freight  when an out-of-stoc situation arises! resulting in added cost for the company of 3!*55. ,euired' ". %etermine whether it is financially advantageous over a 1-month period for  Navigator to adopt the >ust-in-time system. Kow would Navigator describe the ust-in#. time system. ' 7 +ype' "! N "nswer' ". ost profits (6!655 units 9 3*) ,eturn on funds (3=55!555 9 1*F) ease savings (3*!555 9 1) 8avings in ta9es and insurance "ir freight costs +otal 3(10!655) :1!555 *0!555 17!:55 (!*55) 3 1=!155 +he >ust-in-time system is financially advantageous to the firm! saving 31=!155. Note' +he cost of the warehouse employees is ignored because regardless of whether the system is adopted! Navigator will incur the cost. #. Chapter 6 +he ust-in-time inventory policy to curb steadily rising costs and free-up cash for purposes of investment. +he company anticipates that inventory will decrease by 34!465!555! with the released funds to be invested at a 15F return for the firm. "dditional data follow. 1. ,educed inventories should produce savings in insurance and property ta9es of 340!555. . ,educed raw-material inventory levels and accompanying stocouts will cost aredo 376!555. *. aredo will lease 75F of an e9isting warehouse to another firm for 3.65 per suare foot. +he warehouse has 45!555 suare feet. 4. ;our employees who currently earn 3*6!555 each will be directly affected by the >ust-in-time adoption decision. +hree employees will be transferred to other positions with aredo2 one will be terminated. 6. " shift in suppliers is e9pected to result in the purchase and use of more e9pensive raw materials. Kowever! these materials should give rise to fewer warranty and repair problems after aredo/s finished product is sold! resulting in a net savings for the firm of 3*7!555. 0. #ecause of the need to handle an increased number of small shipments from suppliers! aredo will remodel production and receiving-doc facilities at a cost of 3=65!555. +he construction costs will be depreciated over a 15-year life. ,euired' ". $ompute the annual financial impact of aredo/s decision to adopt a >ust-in-time inventory system. #. In comparison with those of a traditional purchasing system! why would the number and si@e of incoming supplier shipments change under a >ust-in-time system? ' 7 +ype' "! N "nswer' ". ,eturn on released funds (34!465!555 9 15F) 8avings in insurance and property ta9es "dded stocout costs ease revenue (45!555 suare feet 9 75F 9 3.65) 8alary savings  Net savings in materials! warranty! and repair costs %epreciation on remodeled facilities (3=65!555 O 15 years) 8avings from I+ system 3446!555 40!555 (76!555) 75!555 *6!555 *7!555 (=6!555) 3474!555 Note' +he cost of the three transferred employees is e9cluded because aredo will continue to have these individuals on the payroll. 160 Hilton, Managerial Accounting, Seventh Edition #. Ender a traditional purchasing system! goods are purchased (freuently in large lots) and then placed in inventory until used. In contrast! with I+! costly inventories are avoided by having the materials arrive <>ust in time< to be issued to production. aterials are therefore purchased only when needed! which often translates into numerous small acuisitions throughout the period. Anal%sis o# *ust-in-Ti!e Pu"c+asin) S%ste! 6. Autnam &nterprises currently purchases a total of 65!555 sensors annually from Etah &lectronics at 375 per unit. +he firm places 6 purchase orders during the year at an average cost of 315 per order. Autnam/s management is contemplating a switch to a >ust-in-time purchasing system that would reuire an increase in orders to 55. ,euired' ". $ompute the average order si@e under both the current system and the proposed >ust-in-time system. "lso! calculate the change in annual purchase-order processing cost. #. &9plain why the number of orders will increase under a >ust-in-time system. $. What benefits might Autnam e9perience to help offset the increase in purchase-order  processing cost? %. What might Etah do to the 375 price! given the company/s need to process an additional 1=6 orders? ' 7 +ype' "! N /nswer2 ". $urrent system' 65!555 sensors O 6 orders M !555 units ust-in-time system' 65!555 sensors O 55 orders M 65 units ust-in-time system' 55 orders 9 315 $urrent system' 6 orders 9 315 Increase in purchase-order processing cost 3!555 65 31!=65 #. Ender a traditional system! orders are large so that adeuate inventories can be maintained. #y increasing the number of orders! companies anticipate that units will arrive on an as-needed basis! thus reducing the need to carry si@able on-hand stocs. $. " reduction in inventories will typically decrease associated costs such as warehousing! insurance! obsolescence! and property ta9es. In addition! monies currently invested in inventories will be released for other profitable uses by management. Autnam may also negotiate that a higher uality sensor be acuired! which would both reduce the need for inspections and increase the overall uality of the firm/s finished product. %. Etah/s cost will liely increase! given that overall volume is constant at 65!555 sensors. "s a result! the firm might be forced to raise the sensor/s selling price. Chapter 6 161 *ust-in-Ti!e Pu"c+asin), Non-Value-Added Activities 6*. ;argo &nterprises! which manufactures lawn mowers! recently installed a >ust-in-time purchasing system and an activity-based management program. ,euired' ". %etermine whether the following items would be apt to increase or decrease as a result of the  >ust-in-time system' 1. Inventory storage costs. . Number of suppliers used. *. Number of raw material shipments handled. 4. %ollars available for alternative investment opportunities. 6. Juality of raw materials purchased. #. Identify the following items as value-added activities! non-value-added activities! or both. 1. "ttaching the engine to the mower/s body. . Installing a new air-conditioning system in the e9ecutive offices. *. ,eplacing a defective wheel with a new wheel. 4. %esigning and printing an owner/s instruction manual for a new model. 6. oving completed mowers to the finished-goods warehouse. 0. "ttaching the handle to the mower/s body. +he process too longer than normal  because of a worer slowdown caused by disgruntled employees. ' *! 7 +ype' N /nswer2 ". 1. %ecrease . %ecrease *. Increase 4. Increase 6. Increase #. 1. . *. 4. 6. 0. Dalue-added Non-value-added Non-value-added Dalue-added Non-value-added #oth &ISCUSSION QUESTIONS Non-Value-Added Costs 64. Non-value-added costs occur in nonmanufacturing organi@ations as well as in manufacturing firms. ,euired' ". &9plain what is meant by a non-value-added cost. #. Identify two potential non-value-added costs for each of the following service providers' airlines! bans! and hotels. ' *! : +ype' ,$! N 162 Hilton, Managerial Accounting, Seventh Edition "nswer' ". Non-value-added costs are the costs of activities that can be eliminated with no deterioration of product uality! performance! or perceived value. +hese activities should be eliminated to save time and money. eneral e9amples include the costs of inspection! moving! waiting! and storing. #.  Airline$& +he cost of preparing e9cess food because of forecasting errors in passenger loads.  +he cost of tracing! returning! repairing! or replacing lost or mishandled luggage.  "dditional compensation paid to flight crews attributable to cancellations or delays from   problems that should have been prevented by routine maintenance.  'an($& +he cost of correcting ban errors in customer accounts.  +he cost of performing manual baning procedures necessitated by computer system  downtime. osses caused by employee embe@@lement and petty thefts.  %efaulted loans made to borrowers who should have been classified as poor riss by  e9isting credit-granting procedures.  Hotel$&     #roen dishes and glassware! loss of or damage to linens and towels. +he cost of replacing lost room eys. +he cost of overstaffing the front des during nonpea hours. &9cess food costs! including preparation. Non-Value-Added Activities 66. What are non-value-added activities? What should companies do with these activities and! in general terms! how should this be done? ' * +ype' ,$ "nswer'  Non-value-added activities are operations that are either (1) unnecessary and dispensable or () necessary! but inefficient and improvable. +hese activities give rise to non-value-added costs! which cut into company profitability. Non-value-added activities should be reduced andBor eliminated through various process improvement techniues. "ctivities may also be shared in some cases! with selected functions being combined and performed in a more efficient manner. Chapter 6 163 ai.en Ve"sus Re-en)inee"in) 60. #riefly distinguish between ai@en and re-engineering. ' 0! = +ype' ,$ "nswer' Gai@en refers to the process of cost reduction during the manufacturing phase of an e9isting  product. +his process taes place gradually! or through small continual improvements rather than through radical change. ,e-engineering! on the other hand! is a bit more drastic! often involving the complete redesign of a process in hopes of finding a creative new way to accomplish an ob>ective. enerally speaing! re-engineering often prescribes radical! uic! and significant change. *ust-in-Ti!e P"oduction 6=. " >ust-in-time production system uses a