Exercises 7-11 Value-added, non-value-added costs. The McGowan Repain services m

Question

Exercises 7-11 Value-added, non-value-added costs. The McGowan Repain services machine tools. A summary of its costs (by activity) for 2012 is as follows: Shop repairs and a. Materials and labor for servicing machine tools b. Rework costs c. Expediting costs caused by work delays d. Materials-handling costs e. Materials-procurement and inspection costs f. Preventive maintenance of equipment g. Breakdown maintenance of equipment $500,000 150,000 75,000 50,000 60,000 40,000 75,000 quired 1. Classity each cost as value-added, non-value-added, or in the gray area between. 2. For any cost assified in the gray area, assume 65% value-added and 35% is non-value-added. How much of the total of all seven costs is value-added and how much is non-value-added? 3. McGowan is considering the following changes:(a) introducing quality-improvement programs whose net effect will be to reduce rework and expediting costs by 60% and materials and labor costs for servicing machine tools by 5%; working with suppliers to reduce material procurement and inspection costs by 20% and materials-handling costs by 25%; and (c) increasing preventive-maintenance costs by 40% 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

Explanation / Answer

1.Category

2. Classification of gray area

In the gray area the total cost 1,50,000

We assume 65% value added cost i.e. 90,000

35% non value added cost i.e. 60,000

Total value added cost = 5,00,000 + 90,000 = 5,90,000

Non value added cost = 2,40,000 + 60,000 = 3,00,000

Then, total cost are 8,90,000

% of value added cost = 5,90,000/8,90,000 = 66%

% of non value added cost = 3,00,000/8,90,000 = 34%

3. McGowan is considering the following changes:

(a) Quality improvement programs to Value added Non value added Gray area

Total effect (15925) (8575) 0

(c) Maintainance program Value added Non value added Gray area

Value added cost a. Materials and labor for regular repairs 5,00,000 Non- value added cost b. Rework cost 90,000 g. Break down maintainance of equipment 75,000 c. Expediting costs caused by work delays 75,000 Total non value added cost 2,40,000 Gray area d.Material handling cost 50,000 e. Material procurement and inspection cost 60,000 f. Preventive maintainance of equipment 40,000 Total gray area cost 1,50,000

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