Acme Manufacturing adopted lean management and reorganized their factory into pr

Question

Acme Manufacturing adopted lean management and reorganized their factory into production cells. Each production cell produces a small family of products or components from start to finish. For the industrial fittings cell, they replaced the CNC machine with a drill press. The drill press is a much less costly machine than the CNC machine. It also has a longer cycle time, but it is faster and easier to set up. The faster setups allowed Acme to reduce their batch sizes from 2,500 to 250. The lean cell is depicted in the figure below. Each fitting requires four minutes on the drill press. Drilled fittings awaiting lathing are located between the two machines in the cell, so lathe operations could begin drilling was complete on the entire batch. However, some time is required to set up the lathe to produce the particular model fitting in the new batch. The fittings completed on the lathe are in placed in front of the grinding machine. Grinding completes work on the batches on a first in, first out basis. Fittings completed on the grinder are placed in front of the inspection and packing workstation. Once the entire batch is complete, it is moved to the warehouse for finished goods storage, and the units are available to be included in shipments to customers. Despite adopting lean management, Acme Manufacturing continues to use standard costing. The standard direct material cost is $1.50 per fitting. The standard direct labor cost is $20 per direct labor hour and the standard overhead cost is $60 per direct labor hour. The standard direct labor time per fitting is equal to the standard processing time in each process. What is the total standard cost per fitting? Show your calculations. Suppose a customer wants 100 fittings of model QX5, not currently in stock. Assuming Acme can instantly begin production of a batch of 250 model QX5s on the drill press when they recede the order, what is the shortest possible amount of time it would take to have the 100 QX5s in the warehouse ready to be shipped to the customer? Explain your answer including any assumptions and calculations Regardless of what the standard costs say, how do you think the actual costs of operating production cells will compare to the conventional departmental organization? What costs are likely to be higher and what costs are likely to be lower?

Explanation / Answer

Total Standard direct labor time per fitting = Standard processing time in each process = 18 minutes per fitting

1. The total Standard Cost per fitting : Direct Material Cost = $1.50 per fitting

Direct Lobor Cost = $6.00 per fitting ( $20 / 60 minutes*18minutes)

Standard Overhead Cost=$18.00 per fitting ($60 / 60 minutes*18 minutes)

Total Standard Cost = $25.50 per fitting

2. Assumptions : As the customers wants 100 fittings of model QX5, 100 fittings could be processed from all the processes with any lag time within the schedule time of 18 minutes per filling. It is not essential to process all 250 Lot size to process at each process station.

The shortest possible amount of time to ready 100 QX5s in the

warehouse to be shipped to the customer = 18 minutes per fitting * 100 fittings = 180 minutes or 3 hours

3. As mentioned, without considering the standard costs, the actual costs of operating production cells will not be compared to the conventional departmental organization costing method which includes the fixed costs portion to the Total Cost of the production. It means the conventional costing/pricing method considers all costs whether it is fixed and variable. Whereas current/modern costing /pricing method considers the decision-making or variable cost standard costing or the contribution method of pricing.

The conventional departmental costing/pricing method would be higher as it includes the all types of costs (fixed + variable) alongwith the profit margin. The modern / contrubution method of costing / pricing wil be lower as it considers only the decision - making costs i.e. variable costs or standard costs for pricing the products.

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