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Operational and Organizational Activities
McConkie Company has decided to pursue a cost leadership strategy. This decision is prompted, in part, by increased competition from foreign firms. McConkie's management is confident that costs can be reduced by more efficient management of the firm's operational activities. Improving operational activity efficiency, however, often requires some strategic changes in organizational activities. McConkie currently uses a very traditional manufacturing approach. Plants are organized along departmental lines. Management follows a typical pyramid structure. Labor is specialized and located in departments. Quality management follows a conventional acceptable quality level approach. (Batches of products are accepted if the number of defective units is below some predetermined level.) Materials are purchased from a large number of suppliers, and sizable inventories of materials, work in process, and finished goods are maintained. The company produces many different products that use a variety of different parts, many of which are purchased from suppliers.
Required:
Given this brief description of the firm and its setting, for each of the following operational activities and their associated drivers, suggest some strategic changes in organizational activities (and drivers) that might reduce the cost of performing the indicated operational activity. Explain your reasoning.
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Answer:
Suggests the changes to the firms' activities to reduce the cost:
Inspecting products, warranty work and reworking products:
They are concerned with quality-specific operations. This provides a clue of strategic modification in the firm related operation, ensuring quality. The concerned executional cost driver will be quality approach. The cost related to all these quality operations can be declined by modifying the driver to total quality management from acceptable quality level.
Moving materials :
The driver is most likely a distant move. This reveals that the executional activity of providing plant layout should be given due consideration the plant layout effectively is its driver. Execution of a cellular approach will be worth while in declining costs pertaining to materials handling.
Setting up equipment :
Setup time is the driver. Organizing processes, opting and undertaking process technologies, and giving plant layout are all enterprise specific activities that can influence the setup process.
Purchasing parts:
Number of variant parts drives this activity. It is a driver which is also concerned with complexion, a structure based activity. This reveals that lowering complexion will decline the number of parts required along with the purchasing activity costs.
Storing goods and materials:
Minimizing inventory days declines the cost concerned with this activity. This provides a likeliness of monitoring the structural activity.
Expediting orders:
Reduction in late orders will lower the cost associated with this activity. This reveals a requirement to minimize manufacturing time, most likely by monitoring the organizational activities like plant layout and capacity provided. Enhancing plant layout will positively decline cycle time.
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Backflush Costing
Hepworth Company has implemented a JIT system and is considering the use of backflush costing. Hepworth had the following transactions for the current fiscal year:
1. Purchased raw materials on account for $600,000.
2. Placed all materials received into production.
3. Incurred actual direct labor costs of $90,000.
4. Incurred actual overhead costs of $625,000.
5. Applied conversion costs of $675,000.
6. Completed all work for the month.
7. Sold all completed work.
8. Computed the difference between actual and applied costs.
Required:
1. Prepare the journal entries for traditional and backflush costing. For backflush costing, assume there are two trigger points: (1) the purchase of raw materials, and (2) the completion of the goods.
2. Assume the second trigger point in Requirement 1 is the sale of goods. What would change for the backflush-costing journal entries?
3. What if there is only one trigger point and it is (a) completion of the goods or (b) sale of the goods? How would the backflush-costing journal entries differ from Requirement 1 for (a) and (b)?
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Answer:
1). Journal entries for traditional and backflush costing:
1. Purchase of raw materials:
2. Materials issued to production:
No Entry
3. Direct labor cost incurred:
Combined with overhead in next entry
4. Overhead cost incurred:
5. Application of overhead:
No entry
6. Completion of goods:
7. Goods are sold:
8. Variance is recognized:
2). The entries for Transactions 6 and 7 in requirement 1 are replaced with the following entry:
All other entries follow those in requirement 1.3). a. There is no entry for Transaction 1. Transaction 6 is replaced the following entry:
b. There is no entry for Transaction 1. Transaction 6 and 7 are replaced with the following entry:
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Competitive Advantage: Basic Concepts
Keith Golding has decided to purchase a personal computer. He has narrowed his choices to two: Brand A and Brand B. Both brands have the same processing speed, hard disk capacity, RAM, graphics card memory, and basic software support package. Both come from companies with good reputations. The selling price for each is identical. After some review, Keith discovers that the cost of operating and maintaining Brand A over a three-year period is estimated to be $200. For Brand B, the operating and maintenance cost is $600. The sales agent for Brand A emphasized the lower operating and maintenance cost. She claimed that it was lower than any other PC brand. The sales agent for Brand B, however, emphasized the service reputation of the product. She provided Keith with a copy of an article appearing in a PC magazine that rated service performance of various PC brands. Brand B was rated number one. Based on all the information, Keith decided to buy Brand B.
Required:
1. What is the total product purchased by Keith?
2. Is the Brand A company pursuing a cost leadership or differentiation strategy? The Brand B company? Explain.
3. When asked why he purchased Brand B, Keith replied, "I think Brand B offered more value than Brand A." What are the possible sources of this greater value? If Keith's reaction represents the majority opinion, what suggestions could you offer to help improve the strategic position of Brand A?
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1.Identify the product purchased by MR.J:
J has purchased a Brand B personal computer with 3.5 inch hard disk, CD ROM drive with basic software support package.
2.Comment the strategy of the 2 brands:
Brand A is pursuing a cost leadership strategy as they offer personal computers with lower operating and maintenance costs as compared to Brand B and other competitors, thereby attracting customers by cost differentiation.
As far as Brand B is concerned they are using differentiation strategy as their Brand comes with higher operating and maintenance costs as compared to Brand A and other competitors but their service quality is good enough to satisfy customers to purchase the product even if its operating and maintenance costs are higher than others.
3.List out the possible sources:
J is satisfied because he is sure that he will get better warranty cover along with satisfactory after sales service and operating and maintenance support for which Brand B is known for.
I will suggest Brand A to improve service quality and they should increase operating and maintenance costs if required. Customers are fond of quality not of lesser price.
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What is an industrial value chain? Explain why a firm's strategies are tied to what happens in the rest of the value chain. Using total quality control as an example, explain how the success of this quality management approach is dependent on supplier linkages.
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Strategic Positioning
San Jose Goodwill Bank has been experiencing significant competition from nonbanking financial service providers such as mutual funds. As a result, interest rates were lower, and the bank found it more difficult to maintain or increase deposits. Profits had declined for the past two years. Concerned about the situation, the bank's executive managers commissioned a consulting group to assess the profitability of the bank's products and customers. The consulting group implemented an ABC system that traced costs to both products and customers. An ABC customer profitability analysis rated the customers on a scale of one to five, with one being the most lucrative. Customers in the number one category earned an average profit of $1,500 per year for the bank, while customers in the fifth category were costing the bank an average of $500 per year. The consulting group also conducted a marketing survey and discovered that the higher- end customers were leaving for banks that offered a broader range of financial products. Armed with the financial and marketing information provided by the consulting group, the banking executives decided to implement the following:
1. Broaden the markets to include investment and insurance products. The goal was to become a complete financial services provider to stop the loss of the higher-end customers. The broadening would also reduce the dependence of the bank on interest-based revenue. (Investment and insurance products produce fee-based revenues.)
2. Alter the customer mix by targeting only the upper three customer segments.
3. Set the bank apart from competitors by offering special, high-quality services to targeted customers:
a. The upper segment of customers will be classified as "Premier One" and will be issued a gold card. When presenting the card to a concierge at the door, the customer will be taken to a special teller window with no line, or to the desk of a specially trained bank officer.
b. For the highest-end customers, no-questions-asked refunds on fees that they think they shouldn't pay (categories one and two). Middle-end customers can negotiate. Low-end customers must pay the fees (categories four and five).
c. Provide secret, toll-free "VIP" numbers to customers in the Premier One category. In this way, they will have immediate access to a bank official for any inquiry they may have.
d. Impose a $4 teller fee for lower-end customers (categories four and five).
4. Improve operating efficiency by increasing productivity and eliminating costs that produce no revenues.
Required:
1. Describe the strategic positioning of San Jose Goodwill Bank in terms of the three general strategies: cost leadership, differentiation, and focusing. Of the three, which one(s) are apparently receiving the most emphasis?
2. Describe the role of cost management in defining the strategic position of the bank. What role do you think cost management will play as the bank attempts to establish and enhance its strategic position?
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What is the difference between a structural cost driver and an executional cost driver? Provide examples of each.
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External Linkages, Activity-Based Supplier Costing
Jackson, Inc., manufactures motorcycles. Jackson produces all the components necessary for the production of the cycles except for one (a carburetor). This component is purchased from two local suppliers: Harvey Parts and Curtis, Inc. Harvey sells the component for $64 per unit, while Curtis sells the same component for $57. Because of the lower price, Jackson purchases 75 percent of its components from Curtis. Jackson purchases the remaining 25 percent from Harvey to ensure an alternative source. The total annual demand is 160,000 carburetors.
Harvey's sales manager is pushing Jackson to purchase more of its units, arguing that its component is of much higher quality and so should prove to be less costly than Curtis's lowerquality component. Harvey has sufficient capacity to supply all the carburetors needed and is asking for a long-term contract. With a five-year contract for 120,000 or more units, Harvey will sell the component for $60 per unit with a contractual provision for an annual product-specific inflationary adjustment. Jackson's purchasing manager is intrigued by the offer and wonders if the higher-quality carburetor actually does cost less than the lower-quality Curtis carburetor. To help assess the cost effect of the two products, the following data were collected for qualityrelated activities and suppliers:
I. Activity data:
II. Supplier data:
Required:
1. Calculate the cost per component for each supplier, taking into consideration the costs of the quality-related activities and using the current prices and sales volume. Given this information, what do you think the purchasing manager ought to do? Explain.
2. Suppose the Quality Control Department estimates that the company loses $3,300,000 in sales per year because of the reputation effect of defective units attributable to failed components. What information would you like to have to assign this cost to each supplier? Suppose that you had to assign the cost of lost sales to each supplier using one of the drivers already listed. Which would you choose? Using this driver, calculate the change in the cost of the Curtis carburetor attributable to lost sales.
II. Supplier data:
Required:
1. Calculate the cost per component for each supplier, taking into consideration the costs of the quality-related activities and using the current prices and sales volume. Given this information, what do you think the purchasing manager ought to do? Explain.
2. Suppose the Quality Control Department estimates that the company loses $3,300,000 in sales per year because of the reputation effect of defective units attributable to failed components. What information would you like to have to assign this cost to each supplier? Suppose that you had to assign the cost of lost sales to each supplier using one of the drivers already listed. Which would you choose? Using this driver, calculate the change in the cost of the Curtis carburetor attributable to lost sales. Essay
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Driver Classification
Classify the following cost drivers as structural, executional, or operational.
a. Number of plants
b. Number of moves
c. Degree of employee involvement
d. Capacity utilization
e. Number of product lines
f. Number of distribution channels
g. Engineering hours
h. Direct labor hours
i. Scope
j. Product configuration
k. Quality management approach
l. Number of receiving orders
m. Number of defective units
n. Employee experience
o. Types of process technologies
p. Number of purchase orders
q. Type and efficiency of layout
r. Scale
s. Number of functional departments
t. Number of planning meetings
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Activity-Based Supplier Costing
Ventana Company is a car window repair and replacement company operating in the after-sales market. Ventana's purchasing manager uses two suppliers (Jones Glass and Claro Glass) for the source of its passenger car windows. Data relating to side windows (Side) and windshields (WS) are given on the next page.
I. Activity Costs
II. Supplier Data
Required:
1. Calculate the activity rates for assigning costs to suppliers.
2. Calculate the total unit purchasing cost for each component for each supplier.
3. What if the quantity of side windows that can be purchased is limited to 15,000 units from Jones and 45,000 units from Claro? There is no limit from either source for windshields. Based on cost, what purchasing mix should be chosen? What problem does this create? What else might you suggest if you were the manager of Ventana?
II. Supplier Data
Required:
1. Calculate the activity rates for assigning costs to suppliers.
2. Calculate the total unit purchasing cost for each component for each supplier.
3. What if the quantity of side windows that can be purchased is limited to 15,000 units from Jones and 45,000 units from Claro? There is no limit from either source for windshields. Based on cost, what purchasing mix should be chosen? What problem does this create? What else might you suggest if you were the manager of Ventana? Essay
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What does it mean to obtain a competitive advantage? What role does the cost management system play in helping to achieve this goal?
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Activity-Based Customer Costing
Deeds Company sells custom-made machine parts to industrial equipment manufacturers by bidding cost plus 40 percent, where cost is defined as manufacturing cost plus order processing cost. There are two types of customers: those who place small, frequent orders and those who place larger, less frequent orders. Cost and sales information by customer category is provided below.
Order-filling capacity is purchased in steps (order-processing clerks) of 1,000, each step costing $40,000; variable order-filling activity costs are $30 per order. The activity capacity is 39,000 orders; thus, the total order-filling cost is $2,715,000 [(39 steps × $40,000) þ ($30 × 38,500)]. Current practice allocates ordering cost in proportion to the units purchased.
Deeds recently lost a bid for 100 units. (The per-unit bid price was $2 per unit more than the winning bid.) The manager of Deeds was worried that this was a recurring trend for the larger orders. (Other large orders had been lost with similar margins of loss.) No such problem was taking place for the smaller orders; the company rarely lost bids on smaller orders.
Required:
1. Calculate the unit bid price offered to Deeds's customers assuming that order-filling cost is allocated to each customer category in proportion to units sold.
2. Assume that a newly implemented ABC system concludes that the number of orders placed is the best cost driver for the order-filling activity. Assign order-filling costs using this driver to each customer type and then calculate the new unit bid price for each customer type. Using this new price, would Deeds have won the bid for the 100 units recently lost?
3. What if Deeds offers a discount for orders of 35 units or more to the frequently ordering customers? Assume that all the frequently ordering customers can and do take advantage of this offer at the minimum level possible. Can Deeds offer the original price from Requirement 1 to the frequently ordering customers and not decrease its profitability?
Order-filling capacity is purchased in steps (order-processing clerks) of 1,000, each step costing $40,000; variable order-filling activity costs are $30 per order. The activity capacity is 39,000 orders; thus, the total order-filling cost is $2,715,000 [(39 steps × $40,000) þ ($30 × 38,500)]. Current practice allocates ordering cost in proportion to the units purchased.
Deeds recently lost a bid for 100 units. (The per-unit bid price was $2 per unit more than the winning bid.) The manager of Deeds was worried that this was a recurring trend for the larger orders. (Other large orders had been lost with similar margins of loss.) No such problem was taking place for the smaller orders; the company rarely lost bids on smaller orders.
Required:
1. Calculate the unit bid price offered to Deeds's customers assuming that order-filling cost is allocated to each customer category in proportion to units sold.
2. Assume that a newly implemented ABC system concludes that the number of orders placed is the best cost driver for the order-filling activity. Assign order-filling costs using this driver to each customer type and then calculate the new unit bid price for each customer type. Using this new price, would Deeds have won the bid for the 100 units recently lost?
3. What if Deeds offers a discount for orders of 35 units or more to the frequently ordering customers? Assume that all the frequently ordering customers can and do take advantage of this offer at the minimum level possible. Can Deeds offer the original price from Requirement 1 to the frequently ordering customers and not decrease its profitability? Essay
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What is customer value? How is customer value related to a cost leadership strategy? To a differentiation strategy? To strategic positioning?
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Exploiting Internal Linkages
Woodruff Company is currently producing a snowmobile that uses five specialized parts. Engineering has proposed replacing these specialized parts with commodity parts, which will cost less and can be purchased in larger order quantities. Current activity capacity and demand (with specialized parts required) and expected activity demand (with only commodity parts required) are provided.
Additionally, the following activity cost data are provided:
Material usage : $20 per specialized part used; $16 per commodity part; no fixed activity cost. Installing parts : $14 per direct labor hour; no fixed activity cost. Purchasing parts: Four salaried clerks, each earning a $45,000 annual salary; each clerk is capable of processing 5,000 purchase orders. Variable activity costs: $0.80 per purchase order processed for forms, postage, etc.
Required:
1. Calculate the cost reduction produced by using commodity parts instead of specialized parts.
2. Suppose that 50,000 units are being produced and sold for $8,800 per unit and that the price per unit will be reduced by the per-unit savings. What is the new price for the configured product?
3. What if the expected activity demand for purchase orders was 8,500? How would this affect the answers to Requirements 1 and 2?
Additionally, the following activity cost data are provided:
Material usage : $20 per specialized part used; $16 per commodity part; no fixed activity cost. Installing parts : $14 per direct labor hour; no fixed activity cost. Purchasing parts: Four salaried clerks, each earning a $45,000 annual salary; each clerk is capable of processing 5,000 purchase orders. Variable activity costs: $0.80 per purchase order processed for forms, postage, etc.
Required:
1. Calculate the cost reduction produced by using commodity parts instead of specialized parts.
2. Suppose that 50,000 units are being produced and sold for $8,800 per unit and that the price per unit will be reduced by the per-unit savings. What is the new price for the configured product?
3. What if the expected activity demand for purchase orders was 8,500? How would this affect the answers to Requirements 1 and 2? Essay
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What are organizational and operational activities? Organizational cost drivers? Operational cost drivers?
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Activity-Based Life-Cycle Costing
Kagle design engineers are in the process of developing a new "green" product, one that will significantly reduce impact on the environment and yet still provide the desired customer functionality. Currently, two designs are being considered. The manager of Kagle has told the engineers that the cost for the new product cannot exceed $550 per unit (target cost). In the past, the Cost Accounting Department has given estimated costs using a unit-based system. At the request of the Engineering Department, Cost Accounting is providing both unit- and activity-based accounting information (made possible by a recent pilot study producing the activity-based data).
Unit-based system:
Variable conversion activity rate: $100 per direct labor hour Material usage rate: $20 per part
ABC system:
Labor usage: $15 per direct labor hour
Material usage (direct materials): $20 per part
Machining: $75 per machine hour
Purchasing activity: $150 per purchase order
Setup activity: $3,000 per setup hour
Warranty activity: $500 per returned unit (usually requires extensive rework)
Customer repair cost: $25 per repair hour (average)
Required:
1. Select the lower-cost design using unit-based costing. Are logistical and post-purchase activities considered in this analysis?
2. Select the lower-cost design using ABC analysis. Explain why the analysis differs from the unit-based analysis.
3. What if the post-purchase cost was an environmental contaminant and amounted to $10 per unit for Design A and $40 per unit for Design B? Assume that the environmental cost is borne by society. Now which is the better design?
Required:
1. Select the lower-cost design using unit-based costing. Are logistical and post-purchase activities considered in this analysis?
2. Select the lower-cost design using ABC analysis. Explain why the analysis differs from the unit-based analysis.
3. What if the post-purchase cost was an environmental contaminant and amounted to $10 per unit for Design A and $40 per unit for Design B? Assume that the environmental cost is borne by society. Now which is the better design? Essay
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What are life-cycle costs? How do these costs relate to the production life cycle?
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