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CHAPTER 6
Activity-Based Management and Todays

Advanced Manufacturing Environment
ANSWERS TO REVIEW !ESTIONS
6-1 The philosophy of a just-in-time (JIT) inventory and production management system
is that no materials are purchased and no products are manufactured until they are
needed. The essence of the JIT philosophy is to reduce all inventories to their
absolute minimum.
6- The !ey features of a just-in-time inventory and production management system are
as follo"s# a smooth production rate$ a pull method of coordinating steps in the
production process$ purchase of materials and manufacture of subassemblies and
products in small lot si%es$ &uic! and ine'pensive setups of production machinery$
high-&uality levels of ra" material and finished products$ effective preventive
maintenance of e&uipment$ an atmosphere of team"or! to improve the production
system$ and multis!illed "or!ers and fle'ible facilities.
6-( )T*+) stands for total &uality control. ,ince no parts are purchased or manufactured
until they are needed for production in a JIT system- it is crucial that they be just
right for their intended purpose.
6.. In a just-in-time (JIT) production system- ra" materials and parts are purchased or
produced just in time to be used at each stage of the production process. This
approach to inventory and production management brings considerable cost
savings from reduced inventory levels.
The !ey to the JIT system is the )pull) approach to controlling manufacturing.
The diagram on the ne't page displays a simple multistage production process. The
flo" of manufacturing activity is depicted by the solid arro"s running do"n the
diagram from one stage of production to the ne't. /o"ever- the signal that triggers
more production activity in each stage comes from the next stage of production.
These signals- depicted by the dashed-line arro"s- run up the diagram. 0e begin
"ith sales at the bottom of the e'hibit. 0hen sales activity "arrants more production
of finished goods- the goods are )pulled) from production stage III by a signal that
more goods are needed. ,imilarly- "hen production employees in stage III need more
inputs- they send a signal bac! to stage II. This signal triggers production activity in
stage II. 0or!ing our "ay bac! up to the beginning of the process- purchases of ra"
materials and parts are triggered by a signal that they are needed in stage I.
McGraw-Hill/Irwin 2002 The McGraw-Hill Companies,
Inc.
Managerial Accounting, 5/e 6- "
The 12ull3 4ethod in a JIT ,ystem
This pull system of production management- "hich characteri%es the JIT
approach- results in a smooth flo" of production and significantly reduced inventory
levels.
6-5 6ive !ey features of JIT purchasing are as follo"s# only a fe" suppliers$ long-term
contracts "ith suppliers$ materials and parts delivered in small lot si%es immediately
before they are needed$ only minimal inspection of delivered parts and materials$
and grouped payments to each vendor.
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6-# Solutions Manual
7emand for ra" materials and parts is signaled "hen
there is a need in stage I for more inputs.
7emand for production activity in stage I is signaled
"hen there is a need in stage II for more inputs.
7emand for production activity in stage II is signaled
"hen there is a need in stage III for more inputs.
7emand for finished goods is signaled "hen sales
activity "arrants more finished units. This signal
triggers manufacturing activity in the final stage of
production (stage III).
2urchasing
2roduction
,tage I
2roduction
,tage II
2roduction
,tage III
,ales
7enotes flo" of materials- parts- partially finished goods- and finished goods.
7enotes a signal that more goods are needed at the ne't stage of production.
6-6 (a) +4, stands for cost management system.
(b) JIT stands for just-in-time.
(c) +8+ stands for computer-numerically controlled.
(d) +94 stands for computer-aided manufacturing.
(e) +97 stands for computer-aided design.
(f) 94/, stands for automated material-handling system.
(g) 64, stands for fle'ible manufacturing system.
(h) +I4 stands for computer-integrated manufacturing.
6-: The !ey differences in the plant layouts used by 9erotech;s 2hoeni' and <a!ersfield
facilities are as follo"s#
(a) The <a!ersfield plant uses a fle'ible manufacturing system.
(b) The <a!ersfield plant uses an automated material-handling system.
(c) The <a!ersfield plant uses a computer-aided design approach.
(d) The <a!ersfield plant has substantially less space devoted to storage of ra"
materials- "or! in process- and finished goods.
6-= The installation of a fle'ible manufacturing system (64,) usually results in a shift in
the cost structure from variable costs to fi'ed costs.
6.> Off-line quality control consists of the activities during the product design and
engineering phases that improve the manufacturability of the product- reduce
production costs- and ensure high &uality.
Cellular manufacturing is the organi%ation of a production facility into 64, cells-
"hich are groupings of machines and personnel designed to manufacture a
particular set of products.
Activity-based management (ABM) is the use of activity-based costing information to
improve operations and eliminate non-value-added costs.
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Managerial Accounting, 5/e 6- $
6-1? The t"o-dimensional activity-based costing model provides one "ay of picturing the
relationship bet"een 9<+ and 9<4. The vertical dimension of the model depicts the
cost assignment vie" of an 9<+ system. 6rom the cost assignment viewpoint the
9<+ system uses t"o-stage cost allocation to assign the costs of resources to the
firm;s cost objects. These cost objects could be products manufactured- services
produced- or customers served.
7epicted in the hori%ontal dimension of the model that follo"s is the process
view of an 9<+ system. The emphasis no" is on the activities themselves- the
processes by "hich "or! is accomplished in the organi%ation. The left-hand side of
the model depicts activity analysis- "hich is the detailed identification and
description of the activities conducted in the enterprise. 9ctivity analysis entails the
identification not only of the activities- but also of their root causes the events that
trigger activities- and the lin!ages among activities. The right-hand side of the model
depicts the evaluation of activities through performance measures. These processes
of activity analysis and evaluation constitute activity-based management.
T"o-7imensional 9<+ 4odel
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6-% Solutions Manual
Cost Assignment "iew
@A,BC@+A +B,T,
9ssignment of resource costs
to activity cost pools
associated "ith
significant activities
#rocess "iew
9ctivity analysis 9ctivity evaluation
2A@6B@498+A
4A9,C@A,
@BBT
+9C,A,
9+TIDITE
T@IFFA@,
9ssignment of activity
costs to cost objects
using second-stage
cost drivers
+B,T B<JA+T,
(products or services
produced$ customers)
9+TIDITIA,
6-11 9ctivity analysis is the detailed identification and description of the activities
conducted in an enterprise. 9ctivity analysis entails the identification not only of
activities- but also of their root causes- of the events that trigger them- and of the
lin!ages among them. Three criteria for determining "hether an activity adds value
are as follo"s#
(a) Is the activity necessaryG
(b) Is the activity efficiently performedG
(c) Is the activity sometimes value-added and sometimes non-value-addedG
6-1 9n activity;s trigger is the preceding event that indicates that the activity should be
performed. The activity;s root cause is the event or activity that- if it had not
occurred- "ould have prevented the activity in &uestion from happening. 6or
e'ample- the event that triggers the activity of re"or! is the identification of a
defective part during inspection. /o"ever- the inspection is not the root cause of the
re"or! activity. The root cause of the defective part- and hence the need for re"or!-
could lie in erroneous part specifications- in an unreliable vendor- or in faulty
production.
6-1( 6our techni&ues for reducing or eliminating non-value-added costs that result from
non-value-added activities are as follo"s#
(a) 9ctivity reduction
(b) 9ctivity elimination
(c) 9ctivity selection
(d) 9ctivity sharing
6.1. A'amples of activity sharing include the use of common parts in several related
products- and the use of a common service facility (e.g.- a photocopying center) by
several departments.
6.15 +ustomer profitability analysis refers to using the concepts of activity-based costing
to determine ho" serving particular customers causes activities to be performed and
costs to be incurred. A'amples of activities that can be differentially demanded by
customers include order fre&uency- order si%e- special pac!aging or handling-
customi%ed parts or engineering- and special machine setups. ,uch activities can
ma!e some customers more profitable than others.
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Managerial Accounting, 5/e 6- &
6-16 9ctivity-based costing is used to analy%e customer-related costs and determine the
cost drivers for these costs. This 9<+ data then forms the basis for the customer
profitability analysis by assigning the appropriate amount of customer-related costs
to each customer.
6-1: 9 customer profitability profile- usually e'pressed in graphical form- sho"s the
companyHs cumulative operating income as a percentage of total operating income.
The customers included in the profile generally are ran!ed either by operating
income or by sales revenue.
6-1= In some cases- companies do eliminate unprofitable customers. /o"ever- it is
important for companies to not to be too &uic! in doing so. +ompanies often
develop customer relationships over long time hori%ons by offering lo" prices and a
high level of service up front. 9s the relationship develops- ho"ever- the customer
may not re&uire the same level of service and might be "illing to pay a premium for
the service. +ustomer profitability analysis helps management see the overall
financial picture for each customer- and ho" management can use this information
to help establish a strategic plan for the coming months- &uarters- or years.
4anagement may decide that it is "orth !eeping an unprofitable customer no" to
maintain the potential for future profitability.
6-1> 9 trend analysis trac!s customer-related costs over time to determine "hether they
are increasing- decreasing- remaining relatively stable or behaving in any particularly
unusual manner. Trend analysis can help management decide "hich customer-
related costs need their attention most urgently- and "hich customers need the most
attention. 2erhaps even better than comparing the customer-related costs to the
companyHs norms- "ould be to compare them to industry-"ide norms- or the norms
for the industryHs best performers. ,uch information can sometimes be generated
from benchmar!ing studies- "hich focus on the best practices of organi%ations both
"ithin the industry and beyond.
6-? Continuous improvement may be defined as the constant effort to eliminate "aste-
reduce response time- simplify the design of both products and processes- and
improve product &uality and customer service.
The price down$cost down concept is the tendency of prices to fall over the life cycle
of a ne"ly introduced product. 4oreover- if prices are to fall over time-
manufacturers must continually reduce costs.
%arget costing is the process of designing a product- and the processes used to
produce it- in order to achieve a manufacturing cost that "ill enable the firm to ma!e
a profit "hen the product is sold at an estimated mar!et-driven price. This estimated
price is called the target price the desired profit margin is called the target profit-
and the cost at "hich the product must be manufactured is called the target cost.
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6-' Solutions Manual
"alue engineering (or value analysis) is a cost-reduction and process-improvement
techni&ue that utili%es information collected about a product;s design and
production processes and then e'amines attributes of the design and processes to
identify candidates for improvement. The attributes e'amined include such
characteristics as part diversity and process comple'ity.
&ai'en costing is the process of cost reduction during the manufacturing phase of
an e'isting product. The Japanese "ord !ai'en refers to continual and gradual
improvement through small betterment activities- rather than large or radical
improvement made through innovation or large investments in technology.
6.1 Iai%en costing is most consistent "ith the old saying )slo" and steady "ins the
race.) Iai%en costing is the process of cost reduction during the manufacturing
phase of an e'isting product. The Japanese "ord !ai'en refers to continual and
gradual improvement through small betterment activities- rather than large or radical
improvement made through innovation or large investments in technology.
6. (mployee empowerment is the concept that "or!ers are encouraged to ta!e their
o"n initiative to improve operations- reduce costs- and improve product &uality and
customer service.
Benc)mar!ing is the continual search for the most effective method of
accomplishing a tas!- by comparing e'isting methods and performance levels "ith
those of other organi%ations- or "ith other subunits "ithin the same organi%ation. 9n
e'ample of benchmar!ing is an airline;s determining ho" many of its competitors;
flights are delayed and comparing the data "ith its o"n flight-delay record.
The most effective methods of accomplishing various tas!s in a particular industry-
often discovered through benchmar!ing- are referred to as best practices.
*eengineering is the complete redesign of a process- "ith an emphasis on finding
creative ne" "ays to accomplish an objective. @eengineering has sometimes been
described as ta!ing a blan! piece of paper and starting from scratch to redesign a
business process. @ather than searching continually for minute improvements- re-
engineering involves a radical shift in thin!ing about ho" an objective should be
met.
Organi'ational culture is the mind-set of employees- including their shared beliefs-
values and goals.
9 c)ange c)ampion is an individual "ho recogni%es the need for change and-
through his or her o"n efforts- see!s to bring it about. 9 successful change
champion is usually at a high level in the organi%ational hierarchy- has strong
entrepreneurial s!ills- demonstrates political savvy "ithin the organi%ation- and has
the ability to persuade and motivate others.
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Managerial Accounting, 5/e 6- (
6-( The t)eory of constraints (TB+) is a management approach that see!s to ma'imi%e
long-term profit through proper management of organi%ation bottlenec!s or
constrained resources. The !ey idea in TB+ is to identify the constraints in a system
that are preventing the organi%ation from achieving a higher level of success. Then
the goal is to relieve or rela' those constraints. TB+ recommends subordinating all
other management goals to the objective of solving the constraint problem. 6or
e'ample- if limited capacity in a particular machining operation is increasing cycle
time- reducing throughput- and reducing profits- then management "ould
concentrate much of its efforts on e'panding the capacity of that bottlenec!
operation. If efforts are continually made to rela' constraints- continuous
improvement in organi%ational performance is a li!ely result.
6-. The elimination of production bottlenec! activities is an e'ample of the theory of
constraints. (,ee the preceding ans"er.)
6-5 6ive !eys to the successful implementation of 9<+- 9<4- or other cost management
approaches are the follo"ing#
(a) ,trong functional organi%ational culture
(b) Top management support and commitment
(c) +hange champion
(d) +hange process
(e) +ontinuing education
6-6 It is human nature to resist change. 4oving from a traditional- volume-based product-
costing system to an activity-based costing system is a radical change in the
managerial-accounting system. 2eople may be uneasy about such a change because
they fear they "ill not understand the ne" system- "ill not be able to effectively use
the information that the ne" system provides- or may be evaluated in a different "ay-
one that may prove unfavorable to"ard them.
The same comments can be applied to the implementation of any of the
management concepts discussed in the chapter (e.g.- continuous improvement-
9<4- Iai%en costing- re-engineering).
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6-) Solutions Manual
SO*!TIONS TO E+ER,ISES
AJA@+I,A 6-: (15 4I8CTA,)
Traditional
6actoryK
JITL64,
6actoryK
@a" materials................................................................................. 7 7
Alectricity- machines..................................................................... I 7
Alectricity- lighting- and air-conditioning..................................... I I
Angineering salaries...................................................................... I 7
+ustodial "ages............................................................................ I I
7epreciation- plant......................................................................... I I
7epreciation- e&uipment............................................................... I 7
Insurance........................................................................................ I I
4achine repair- "ages................................................................... I 7
4achine repair- parts..................................................................... I 7
7irect labor..................................................................................... 7 7
,upervisory salaries...................................................................... I I
2roperty ta'es................................................................................ I I
6actory supplies............................................................................ I 7
Inspection....................................................................................... I 7
K7 denotes direct$ I denotes indirect
AJA@+I,A 6-= (5 4I8CTA,)
1. 9irline#
(a) )7eadheading-) the practice of flying a non"or!ing flight-cre" member to
another city to "or! on a flight departing from that location. The cre" member
sometimes displaces a paying customer.
(b) 2reparing e'cess food for a flight- "hich is not consumed- because the flight
occupancy "as misforecast.
(c) @eturning- repairing- or replacing lost or mishandled luggage.
(d) +anceling a flight because of an aircraft maintenance problem that should have
been prevented by routine maintenance.
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Managerial Accounting, 5/e 6- -
AJA@+I,A 6-= (+B8TI8CA7)
. <an!#
(a) +orrecting customer account errors due to !eypunch errors in the ban!.
(b) 6ollo"ing up on chec!s or deposit slips lost by the ban!.
(c) 2erforming ban!ing procedures manually "hen the computer is do"n.
(d) 7efaulted loans made to ris!y borro"ers as a result of inade&uate credit chec!s.
(e) Mosses due to employee embe%%lement and petty theft.
(. /otel#
(a) <rea!age of dishes and glass"are$ loss of or damage to linens and to"els.
(b) Moss of room !eys.
(c) Bverstaffing the front des! during nonpea! hours.
(d) 2reparing e'cess food.
AJA@+I,A 6-> ((? 4I8CTA,)
The s!y;s the limit on responding to this problem. 9 good model for the response is
contained in +hapters 5 and 6 for 9erotech +orporation.
(1) The major steps in 9erotech;s traditional production process are described at the
beginning of +hapter 5.
() 9erotech;s <a!ersfield plant layout- "hich uses advanced manufacturing technology-
is sho"n in A'hibit 6-1.
(() 9n e'planation of ho" 9erotech;s <a!ersfield facility eliminated or reduced non-value-
added costs is given in +hapter 6. ,ee the pages around A'hibit 6-1. 6or e'ample- the
<a!ersfield facility eliminated the holding areas bet"een production departments-
thus eliminating the non-value-added cost of "aiting time. 9erotech also installed an
automated material-handling system in the <a!ersfield facility that resulted in
substantial reductions in the non-value-added costs of move time.
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6-". Solutions Manual
AJA@+I,A 6-(? (.? 4I8CTA,- 2MC, TI4A 9T @A,T9C@98T)
,everal restaurant activities are listed in the follo"ing table- along "ith the re&uired
characteristics for each activity. 4any other possibilities could be listed- depending on the
level of detail.
9ctivity 7escription
Dalue-9dded
or 8on-Dalue-
9dded 9ctivity Trigger @oot +ause
Ta!ing reservations D9 +ustomer calls on
phone
+ustomer desires
reservation
+ustomers "aiting
for a table
8D9 +ustomer arrives- but
no table is ready
9n error "as made in
reservation$ service is slo"$
customers are slo"$
customers arrive "ithout
reservations
,eating customers D9 Table becomes
available
+ustomer;s reservation (or
turn in line) comes up$ table
becomes ready
Ta!ing orders D9 +ustomers indicate
readiness to order
Iitchen staff needs to !no"
"hat to prepare
,erving meals to
customers
D9 4eals are ready 4eals are ready$ customers
are hungry
@eturning meal to
!itchen for revised
preparation
8D9 +ustomer complains
about meal
9n error "as made in
e'plaining the menu$ there
is an error in the printed
menu description$ meal "as
prepared "rong$ customer
is pic!y
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Managerial Accounting, 5/e 6- ""
AJA@+I,A 6-(? (+B8TI8CA7)
+ustomers eating
meal
D9 4eals are served and
are satisfactory
+ustomers are hungry
+learing the table D9 +ustomers are
finished
+ustomers are finished
7elivering chec! to
table
D9 +ustomers are
finished ordering and
eating
+ustomers need to !no"
amount of bill
+ollecting payment D9 +ustomers have
produced cash or
credit card
@estaurant needs to collect
payment for services
rendered
AJA@+I,A 6-(1 ((? 4I8CTA,)
1. 7escription of course registration process#
(a) @eceive list of courses in mail- along "ith )bubble sheet) for filling in desired
courses and sections.
(b) 7uring allotted "ee!- select courses and fill in bubble sheet.
(c) @eturn bubble sheet to bursar;s office. Bften must stand in line for more than an
hour to turn in sheet. @e&uired- since sheet and student I7 must be chec!ed by
bursar;s personnel.
(d) Bne month later- receive preliminary schedule. If acceptable- no further action
necessary. Just pay tuition. 9utomatically enrolled. 6inal schedule received
shortly- before ne't semester starts. If didn;t pay tuition- schedule is dropped.
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6-"# Solutions Manual
AJA@+I,A 6-(1 (+B8TI8CA7)
(e) If schedule is unacceptable- attend )7ropL9dd) "ith 15-??? other students in the
bas!etball arena. This is a madhouse and a guaranteed headache. 2osted
around the entrance are lists of open classes- but the list is often out of date
"ithin an hour or so. Csing carbon-copy dropLadd forms- select ne" class(es).
(f) ,tand in line corresponding to last four digits of social security number so that
bursar;s personnel can chec! course availability. Bften in line for (? minutes or
more- depending on time of day.
(g) If course available and re&uirements for course met- enrolled on the spot. If not-
must initiate process all over again- or could be placed on a "ait list. ,chedule
resulting from dropLadd process received shortly before classes start.
(h) If schedule unacceptable or if didLdidn;t get off "aiting list once school begins-
fill out dropLadd form- get approval by the relevant professor- and submit to the
bursar. Mong lines once again.
. 9ctivity analysis#
(a) 9ctivity analysis loo!s at activity lin!ages- activity triggers- and root causes. It
should also consider the goals of the parties involved. ,tarting "ith the goals-
students "ant a faster- easier registration method that does not re&uire standing
in line for hours to obtain information or approvals. They "ant to be able to
prioriti%e their class selections- get relatively fast feedbac! on "hether or not
they are in a class- and !no" "here they stand on the "aiting list. The college
"ants a faster- easier registration method that does not re&uire so much
paper"or! and direct labor- is less costly- provides timely information on class
availability- is accurate- and enrolls only paid students.
(b) 9ctivity lin!ages#
7escribed in re&uirement (1).
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Managerial Accounting, 5/e 6- "$
AJA@+I,A 6-(1 (+B8TI8CA7)
(c) 9ctivity triggers#
The time of year triggers the registration process. The approval re&uirement
triggers time delays. 9 high volume of students turning in sheets at same time
triggers delays. +lass availability and preferences trigger the need for 7ropL9dd.
The mad-house at 7ropL9dd is triggered by a lac! of up-to-date information- a
high volume of students- and approval re&uirements. The "aiting list procedure
and the late delivery of schedules trigger more registration frustration- approval
time- and time at the bursar;s office the first "ee! of classes.
(d) @oot causes#
The information system cannot automatically approve students; credentials or
confirm that registration has been done correctly. The time during "hich
students must submit schedules is very compressed- and all must flo" through
the bursar- "hich has only four lines- essentially on the same day- thus creating
a bottlenec!. ,tudents are not able to list classes in order of preference- so
7ropL9dd is re&uired for most of the student body. The dropLadd process is
highly inefficient and information is not timely. The information system does not
provide timely information- so problems "ith registration must be fi'ed in a rush
during the busiest time of the semester.
(. @eengineering#
<ased on the root causes- activity triggers- lin!ages- and goals- the college
could benefit from a computeri%ed information net"or! that is accessible to
students at all computer labs around campus and by modem. This system "ould
enable many more students to register for classes at the same time- at their
leisure- and allo" them to note preferences via a point-"eighting system. The
system "ould automatically chec! credentials (i.e.- student I7- social security
number- tuition status) against e'isting records- thus eliminating the bursar
bottlenec!- and it "ould lead students through the process to ensure accuracy.
The process "ould enable the bursar to &uic!ly run a class-fill program on the
submitted data to produce schedules. The absence of dropLadd forms "ould
reduce bursar paper"or! and cost significantly. 9 dropLadd time period could be
established for students to &uic!ly confirm class availability "ithout dealing "ith
the dropLadd madhouse. The system "ould reveal placement and progress on
the "aiting list- and "ould produce final schedules that could be delivered via
mail or an e-mail system- a "ee! or so after 7ropL9dd. Then any problems could
be remedied before classes begin. (This solution is courtesy of 9my 4urchison-
a managerial-accounting student.)
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6-"% Solutions Manual
AJA@+I,A 6-( (15 4I8CTA,)
,everal activities performed (or at least supported) by an airline;s ground employees- along
"ith possible performance measures- are as follo"s#
9ctivity 2erformance 4easure
4a!ing reservations over the phone @eservations boo!ed per hour
2ercentage of reservations "ith
errors
8umber of customer complaints
Tagging luggage <ags tagged per hour
2ercentage of bags incorrectly tagged
/andling luggage <ags handled per hour- per employee
8umber of bags damaged
2ercentage of bags sent to "rong
destination
4aintaining aircraft 4aintenance procedures per shift- per
employee (both routine and repair)
8umber of repair incidents per month
8umber of flight delays due to
maintenance problems
Anplaning passengers 8umber of passengers enplaned
8umber of customer complaints
9verage time re&uired at gate to enplane
passengers
2reparing aircraft for departure 8umber of aircraft departures per month
2ercentage of flights "ith delays
9verage delay per flight delayed
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Managerial Accounting, 5/e 6- "&
AJA@+I,A 6-(( ((? 4I8CTA,)
Memorandum
7ate# Today
To# 2resident- <ig 9pple 7esign +ompany
6rom# I. 4. ,tudent- +ontroller- <ig 9pple 7esign +ompany
,ubject# +ustomer-2rofitability 9nalysis
The customer-profitability analysis ran!s customers on the basis of operating income. 9s
the graph sho"s- customers 5 and 6 are not profitable for <ig 9pple 7esign +ompany.
There are several possible courses of action- including the follo"ing four#
7rop customers 5 and 6.
@aise the prices for customers 5 and 6.
+ut the costs of serving customers 5 and 6 by cutting bac! on services.
Try to increase higher-priced services to customers 5 and 6 in order to ma!e these
customer relationships profitable.
AJA@+I,A 6-(. (5 4I8CTA,)
1. +ustomers ran!ed by sales revenue#
(1) 1?= (11) 11(
() 11. (1) 1(5
(() 11 (1() 1((
(.) 116 (1.) 1?6
(5) 11? (15) 111
(6) 1. (16) 1?:
(:) 11 (1:) 1(.
(=) 1: (1=) 11>
(>) 15 (1>) 1(6
(1?) 1= (?) 1(:
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6-"' Solutions Manual
AJA@+I,A 6-(. (+B8TI8CA7)
Ees- the ran!ing by sales revenue is different from that based on operating income.

. 8o- 9erotechHs least profitable customers are not the ones "ith the lo"est sales
revenue. The least profitable customers are numbers 11> and 1(..
(. Ees- the profile "ould be different- because the ordering of the customers along the
hori%ontal a'is "ould match the order in re&uirement (1) instead of the ordering in
A'hibit 6-11.
.. 9 customer characteri%ed by high sales revenue "ould not necessarily be the most
profitable- because the customer may demand costly services such as special
handling or pac!aging- fre&uent small shipments- or uni&ue design features.
AJA@+I,A 6-(5 (15 4I8CTA,)
1. Trend analysis (percentages rounded)#
Customer-*elated Cost +tem ,ear - ,ear . ,ear / ,ear 0 ,ear 1
+ost of engineering changesNNNNNNN. 1.1O 1.>O 1.1O 1.1O 1.?O
,pecial pac!agingNNNNNNNNNNNN. 11.?O 11.5O 1(.?O 1.?O 1.?O
. +onclusions#
The cost of engineering changes for customer number 61.- "hich remained
consistently lo" for four tears- spi!ed to a very high level in year 5. ,omething unusual
must have occurred in year 5- and this should be investigated by management.
,pecial pac!aging costs- although consistent across the five-year period- are &uite high.
This may be necessary- due to the special needs of customer number 61.- but this
consistently high cost should be investigated by management. There may be a "ay to cut
this cost- possibly "ith the cooperation of the customer.
Inc.
Managerial Accounting, 5/e 6- "(
AJA@+I,A 6-(6 ((? 4I8CTA,)
6edA' could use customer profitability analysis to analy%e "hich customers (particularly
commercial customers) are more e'pensive to serve and- thus- less profitable. ,ee
the 4anagement 9ccounting 2ractice (4.9.2.) inset on page .( of the te't.
AJA@+I,A 6-(: (5 4I8CTA,)
1. 2rocess time# steps (- 5- 6- :- =- 1?- 11
Inspection time# steps 1- >
4ove time# steps - 5- 6- :- 1?- 11
0aiting time# steps .- 5- :
,torage time# steps 1- 11
. +andidates for non-value-added activities#
(a) ,tep # +arrying ingredients on hand carts.
(b) ,tep .# ,toring dough until bagel machine is free. (+ould move to"ard a JIT
system for dough mi'ing.)
(c) ,tep 5# Ieeping cut-out bagels until boiling vat is free. (+ould move to"ard
JIT system.)
(d) ,tep :# +arrying bagels to oven room.
(e) ,tep :# +ontinual opening and closing of oven door.
(f) ,tep ># +onsumption of misshapen bagels by the staff. (+ould these faulty
products be sold at a reduced priceG)
(g) ,tep 1?# +arrying "ire bas!ets to the pac!aging room.
(h) ,tep 11# 7riving for!lift to free%er.
Inc.
6-") Solutions Manual
AJA@+I,A 6-(= (.? 4I8CTA,)
(1) @edesigned bagel production process#
(a) Ingredients- such as flour and raisins- are received and inspected in the morning
or afternoon they are to be used. Then they are placed on a conveyor belt that
transports the ingredients to the mi'ing room ne't door.
(b) 7ough is mi'ed in .?-pound batches in four heavy-duty mi'ers. The dough is
placed on large boards- "hich are set on the conveyor. The conveyor transports
the boards of dough into the bagel room ne't door.
(c) The board is tipped automatically and the dough slides into the hopper of a
bagel machine. This machine pulls off a piece of dough- rolls it into a cylindrical
shape- and then s&uee%es it into a doughnut shape. The bagel machines can be
adjusted in a setup procedure to accommodate different si%es and styles of
bagels. 0or!ers remove the uncoo!ed bagels and place them on a tray. The
trays are set on the conveyor- "hich carries the uncoo!ed bagels into an
adjoining room.
(d) This room houses three 5?-gallon vats of boiling "ater. The bagels are boiled for
appro'imately one minute.
(e) <agels are removed from the vats "ith a long-handled strainer and placed on a
"ooden board. The boards full of bagels are placed on the conveyor- "hich
transports them to the oven room.
(f) The t"o ovens contain eight rac!s that rotate but remain upright- much li!e the
seats on a 6erris "heel. 9 rac! full of bagels is finished ba!ing after one
complete revolution in the oven. 0hen a rac! full of bagels is removed from the
oven- a fresh rac! replaces it. The oven door automatically opens and closes as
each rac! completes a revolution in the oven.
(g) 9fter the bagels are removed from the oven- they are placed in bas!ets for
cooling.
(h) 0hile the bagels are cooling- they are inspected. 4isshapen bagels are removed
and set aside for sale at a reduced price.
Inc.
Managerial Accounting, 5/e 6- "-
AJA@+I,A 6-(= (+B8TI8CA7)
(i) 9fter the bagels are cool- the "ire bas!ets are placed on the conveyor and
transported to the pac!aging room ne't door.
(j) /ere the bagels are dumped automatically into the hopper on a bagging
machine. This machine pac!ages a half do%en bagels in each bag and seals the
bag "ith a t"ist tie.
(!) Then the pac!aged bagels are placed in cardboard bo'es- each holding . bags.
(l) The bo'es are placed in the free%er- "here the bagels are fro%en and stored for
shipment. The free%er has a door in the pac!aging room- and another door in the
shippingLreceiving room.
() Iey features of a JIT system#
The ne" production process of <etter <agels- Inc. has a smoot) uniform production
rate "ith each part of the process being initiated by the subse&uent operation. Thus-
the bagelry uses a pull met)od of coordinating production steps2 The ingredients are
purc)ased as needed in small lot si'es delivered t"ice daily- and sent immediately to
the mi'ing room. The bagel machine is designed for quic! setups for different bagel
si%es and consistency. Bnly )ig)-quality ingredients are used in order to eliminate
do"n time and to follo" a total quality control philosophy. %)e mac)inery is carefully
maintained2 The bagelry;s employees are encouraged to suggest improvements in the
product or production process. Amployees "hose suggestions are adopted receive
cash a"ards or peer recognition. 9ll of the bagelry;s employees are trained in each
phase of the production process. Thus- <etter <agel;s multis!illed wor! force enables
the firm to operate "ith fe"er employees.
(() 8e" e&uipment#
<etter <agels- Inc. "ould need to purchase a ne" conveyor system that "ould
transport partially completed bagels bet"een production steps. The conveyor "ould
tip the bagels automatically into appropriate production machines at various points in
the process. 9lso needed "ould be an efficient oven that "ould open and close
automatically (and &uic!ly) to minimi%e heat loss.
Inc.
6-#. Solutions Manual
AJA@+I,A 6-(> (5 4I8CTA,)
1. Target cost P Q15 R Q5 P Q1??
. Target profit P Q5
(. Target price P Q15
.. Target costing involves designing a product- as "ell as the process used to
manufacture it- so that ultimately the product can be manufactured at a cost that "ill
enable the firm to ma!e a profit "hen the product is sold at an estimated mar!et-
driven price. In the case of the photon gismo- the design engineering team needs to
redesign the gismo andLor the production process so that the gismo can be
manufactured for Q1??.
5. Dalue engineering is a cost-reduction and process-improvement techni&ue that
utili%es information collected about a product;s design and production process- and
then e'amines this information to identify candidates for improvement. 9n e'ample- in
the conte't of the photon gismo- is using a machine to assemble several parts-
instead of assembling them manually.
6. The activity phase of a t"o-dimensional 9<+ system could help solve the problem
"ith the photon gismo. This phase "ould identify activities in the gismo;s production
process- as "ell as the lin!ages- triggers- and root causes of those activities. 6or
e'ample- suppose that part of the photon gismo;s cost includes the inspection of a
particular component that is sometimes damaged in the assembly operation.
6urthermore- suppose that the root cause of that damage is subse&uently determined
to be e'cessive tightening of a bolt on the mounting chassis for the photon gismo;s
parts. Aliminating the problem of e'cessive tightening "ould potentially also eliminate
the need for inspecting the component.
Inc.
Managerial Accounting, 5/e 6- #"
AJA@+I,A 6-.? (5 4I8CTA,)
9 "ide range of ans"ers is possible for this e'ercise.
1. 9ll colleges and universities have admissions departments- course registration
procedures- and teaching operations. 9ll aspects of these operations could be
benchmar!ed against similar institutions of higher education. 6or e'ample- ho" does
an undergraduate school of business administration "ith an enrollment of 1-???
students compare "ith five other similar business schools on the follo"ing
dimensions#
a. 9verage grade point average (F29) of students admitted to the business school.
b. 8umber of course offerings.
c. 8umber of corporate recruiters visiting the campus.
d. 9verage number of employment offers received per student.
e. 2ercentage of graduates "ho try for professional certification and are
successful in doing so. (6or e'ample- of the school;s graduates "ho ta!e the
+29 or +49 e'amination- "hat is the percentage of students "ho pass the
e'amG)
. 9 college or university could also benefit from benchmar!ing )outside the bo'.) 9ll
colleges and universities have grounds and maintenance departments- food service
operations- and housing operations. ,o do hospitals and hotels. These types of
college operations could be benchmar!ed against similar operations in hospitals or
hotels.
+olleges have course scheduling procedures. ,cheduling is also an important activity
in airlines- bus lines- railroads- hospitals- and landscaping firms- to name a fe".
2ublic service is an important component of the mission of many colleges and
universities. Affectiveness in this area could be benchmar!ed against a service
organi%ation such as the 9merican @ed +ross.
9cademic advising and counseling for students in a college or university could be
benchmar!ed against similar operations in employment search firms and human
resources departments in for-profit businesses.
In short- the s!y;s the limit on the !inds of organi%ations against "hich a college or
university might effectively benchmar! its operations.
Inc.
6-## Solutions Manual
SO*!TIONS TO /ROB*EMS
2@B<MA4 6-.1 (.5 4I8CTA,)
1. 9ndromeda +orporation# Traditional plant layout.
Inc.
Managerial Accounting, 5/e 6- #$
6inished-Foods ,torage
,hippingL
@eceivingL
Inspection
@a"-
4aterials
,torage
*uality
+ontrol
Tool and
7ie
7epartment
+utting
4achines
0or!-in-2rocess
,torage
/eading
4achines
0or!-in-2rocess
,torage
Bil
6iltration
,ystem
,lotting
4achines
0or!-in-2rocess
,torage
Threading
4achines
0or!-in-2rocess
,torage
<olt 0ashers
0or!-in-2rocess
,torage
,alt <ath
(/eat Treatment)
0or!-in-2rocess
,torage
Inspection
9nd
Testing
0or!-in-2rocess
,torage
2ac!aging
2urchasing
9nd
Inventory
+ontrol
2roduction
,cheduling
,ales and
4ar!eting
2lant
4anager
9nd
,taff
2ersonnel 9ccounting
Industrial
Angineering
Alectronic
7ata
2rocessing
1.
.
(.
..
5.
6.
:.
=.
>.
4aintenance
9nd
+ustodial
2@B<MA4 6-.1 (+B8TI8CA7)
. (a) 9ndromeda +orporation# 9dvanced manufacturing system and plant layout.
Inc.
6-#% Solutions Manual
1
(
.
5
,hippingL
@eceiving
Inspection
6inished-Foods ,torage
7etail of 64,
cell on ne't
page.
6le'ible
4anufacturing
,ystem (64,)
+ell
4aintenance
9nd
+ustodial
*uality
+ontrol
Angineering
7esign
+omputer
+enter
9ccounting
2lant 4anager and ,taff
,ales and
4ar!eting
2urchasing
and
Inventory
+ontrol
2roduction
,cheduling
2ersonnel
9utomated 4aterial-
/andling ,ystem
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2@B<MA4 6-.1 (+B8TI8CA7)
(b) 9ndromeda +orporation# 64, cell.
Inc.
Managerial Accounting, 5/e 6- #&
1.
.
(.
..
5.
+utting
/eading
,lotting
Thread-
ing
0ashing
2@B<MA4 6-. ((? 4I8CTA,)
4emorandum
7ate# Today
To# 2resident- 9ndromeda +orporation
6rom# I.4. ,tudent
,ubject# 8on-value-added costs
I have identified several activities in the company;s production process that may be non-
value-added activities- that is- activities that are not essential and do not add value to the
product. 9s a result- I believe the firm is incurring substantial non-value-added costs.
,everal of these costs are listed belo".
1. ,torage time
(a) @a" materials are ordered too far in advance of their use. They remain stored in
inventory.
(b) 6inished goods often are produced before they are needed for sale. They remain
stored in inventory.
. 0aiting time
2artially completed bolts are produced before the ne't production operation is ready
for them. The "or! in process sits "aiting in various holding areas.
(. 4ove time
Too much time is spent moving ra" material- "or! in process- and finished goods
from process to process.
Inc.
6-#' Solutions Manual
2@B<MA4 6-. (+B8TI8CA7)
.. Mabor force
Bur "or! force is larger than it needs to be. If "e purchased a fle'ible manufacturing
system- more of the "or! could be done by automated e&uipment. Aach production
employee "ould be able to handle several operations in an 64, cell.
I believe the firm can eliminate most of the non-value-added costs by installing
a fle'ible manufacturing system and an automated material-handling system. In
conjunction "ith these changes in manufacturing technology- the company should
adopt a just-in-time production and inventory management system. This system
"ould reduce inventories of all types and save the non-value-added costs of
unnecessary investment in ra" materials- "or! in process- and finished goods.
2@B<MA4 6-.( ((? 4I8CTA,)
1. If Ielifo Alectric Dehicle +ompany (IAD+B) implements a )demand pull) production
philosophy- both its planning and operating processes could e'perience the follo"ing
effects.
#lanning
2roduction planning "ill change from a centrali%ed batch function process to a
more decentrali%ed activity. In some cases- production teams "ill be responsible
for the entire production process of a product.
The method and timing of ho" the company prepares its production schedule
(including capacity re&uirements) "ill change to parallel the )demand pull)
approach as opposed to the )production push) approach.
The 2urchasing 7epartment "ill need to plan to have high-&uality- reliable- and
fle'ible suppliers "ho can &uic!ly deliver orders of varying si%es as needed.
Operations
+hange-over time (set-up time) "ill reduce lead times significantly.
9 !anban-li!e system "ill have to be implemented. 9 triggering device such as a
!anban card is necessary so that the department or cell !no"s "hen to begin
production.
Freater employee participation "ill result from cell production team arrangements.
Inc.
Managerial Accounting, 5/e 6- #(
2@B<MA4 6-.( (+B8TI8CA7)
. 6ive benefits to IAD+B in changing to a )demand pull) production operating
philosophy are as follo"s#
Mess re"or! and fe"er defective units because of cell-level accountability and
control and product problem solving at the cell level.
9 lo"er cash investment in inventory and plant space. /andling- storage-
insurance- brea!age- and obsolescence all "ill be lo"er.
4ore satisfied customers should result because of shorter lead times and higher
&uality.
Improved labor productivity as a result of rearranging the production process and
the creation of manufacturing cell teams.
9 reduction of the number of suppliers- leading to improved relationships and
communication.
(. ,ome of the behavioral effects of the proposed change at IAD+B on team
participation in planning and production include the follo"ing#
/igher team morale and motivation- since each cell team is responsible for all cell
production and "ill- therefore- have more control over their "or! and an increased
sense of o"nership.
/igher individual satisfaction- development- and motivation- as management "ill
encourage participation- training- and input on ho" to improve the product and
production process.
9 possible resistance to change by those employees "ho may feel insecure or
threatened by the change.
9 sense of partnership "ith management in achieving the goals and objectives of
the organi%ation.
Inc.
6-#) Solutions Manual
2@B<MA4 6-.. (5 4I8CTA,)
1. 9nnual financial impact#
@eturn on released funds
S(Q(-6??-??? - Q6??-???) ' 1OTNNNNNNNN Q(6?-???
,avings in insurance and property ta'esNNNNN :-???
Mease revenue ((?-??? s&uare feet ' :5O ' Q)NN. .5-???
7epreciation on remodeled facilities
(Q6??-??? 1? years)NNNNNNNNNNNN.. (6?-???)
,avings in "arranty and repair costsNNNNNN... 5-???
,alary savingsKNNNNNNNNNNNNNNNN... (?-???
9dded stoc!out costsNNNNNNNNNNNNN... (:?-???)
,avings from JIT systemNNNNNNNNNN... Q(5:-???
K 8ote# The cost of the t"o transferred employees is e'cluded
because 9lliance "ill continue to have these individuals on
the payroll.
. 0ith a just-in-time purchasing system- companies avoid costly build-ups of ra"-
material inventories because materials and parts are ordered only "hen needed. The
suppliers under such a system are highly reliable and deliver &uality goods on time.
Thus- despite the absence of inventories that firms can rely on if needed- the
li!elihood of e'cessive stoc!outs is fairly lo".
(. Mong-term contracts under a JIT purchasing system set tight standards "ith respect
to the &uality of materials purchased. The &uality is high- "hich reduces the need
for incoming inspections.
.. Cnder a traditional purchasing system- goods are purchased (fre&uently in large
lots) and then placed in inventory until used. In contrast- "ith JIT- costly inventories
are avoided by having the materials arrive 1just-in-time3 to be issued to production.
4aterials are therefore purchased only "hen needed- "hich often translates into
numerous small ac&uisitions throughout the period.
2@B<MA4 6-.5 ((? 4I8CTA,)
1. 9ctivity-based management refers to the use of activity-based costing to improve
operations and eliminate non-value-added costs. These costs arise from non-value-
added activitiesUoperations that are either (a) unnecessary and dispensable or (b)
necessary but inefficient and improvable. 2ut simply- such activities can be
eliminated "ithout harming overall &uality- performance- or perceived value.
Inc.
Managerial Accounting, 5/e 6- #-
2@B<MA4 6-.5 (+B8TI8CA7)
. +ost of non-value-added activities#
Incoming receipts# Q(??-??? -??? purchase orders P Q15? per purchase
order
0arehousing# Q(6?-??? >-??? inventory moves P Q.? per move
Butgoing shipments# Q5-??? 15-??? shipments P Q15 per shipment
0arehousing# 55? moves ' Q.?NNNNNNN. Q-???
Butgoing shipments# 5? shipments ' Q15NN (-:5?
TotalNNNNNNNNNNNNNNNNNN Q5-:5?
(. A'tra inventory moves in the "arehouse may be caused by boo!s being shelved (i.e.-
stoc!ed) incorrectly- poor planning for the arrival and subse&uent
placementLstoc!ing of ne" titles- and other similar situations. A'tra shipments
"ould li!ely be the result of errors in order entry and order filling- goods lost in
transit- or damaged merchandise being sent to customers.
.. 9s the follo"ing figures sho"- the elimination of non-value-added activities allo"s
<oo!8et.+om to achieve the target-cost percentage for soft"are only.
9ctivity
+ost-7river
*uantity
O
<oo!s
O
,oft"are
+ost-7river
*uantity#
<oo!s
+ost-7river
*uantity#
,oft"are
Incoming
receiptsNN. -??? :?O (?O 1-.?? 6??
0arehousingN. >-??? =?O ?O 6-65?K 1-=??
Butgoing
shipmentsN 15-??? 5O :5O (-:5? 11-???KK
K (>-??? moves ' =?O) R 55?
KK (15-??? shipments ' :5O) R 5?
Inc.
6-$. Solutions Manual
2@B<MA4 6-.5 (+B8TI8CA7)
<oo!s ,oft"are
Incoming receipts#
1-.?? purchase orders ' Q15?NNN.. Q1?-???
6?? purchase orders ' Q15?NNNN. Q >?-???
0arehousing#
6-65? moves ' Q.?NNNNNNNN... 66-???
1-=?? moves ' Q.?NNNNNNNN... :-???
Butgoing shipments#
(-:5? shipments ' Q15NNNNNNN 56-5?
11-??? shipments ' Q15NNNNNN. 165-???
Total costNNNNNNNNNNNNNN. Q5(-5? Q(:-???
+ost as a percentage of sales#
Q5(-5? Q(->??-???NNNNNNN 1(.65O
Q(:-??? Q-6??-???NNNNNNN 1.5=O
5. 9dditional cost cutting of Q5-5? is needed for boo!s to achieve the 1(O target of
Q5?:-??? (Q(->??-??? ' 1(O). Tools that the company might use include customer-
profitability analysis- target costing- value engineering- !ai%en costing-
benchmar!ing- and reengineering.
Inc.
Managerial Accounting, 5/e 6- $"
2@B<MA4 6-.6 (5? 4I8CTA,- 2MC, TI4A ,2A8T 9T F@B+A@E ,TB@A 987 <98I)
This is a chance to thin! carefully about ho" detailed and precise an activity analysis can
be. It;s also an opportunity to invo!e your sense of humor and air your pet peeves about a
couple of errands "e all have to do routinely.
There is clearly no single correct ans"er. @easonable ans"ers "ill vary "idely.
1. 9ctivity se&uences and lin!ages#
Frocery ,tore <an!
(1) ,trategically choose time of day-
!eeping in mind (a) ho" urgent need
is- (b) li!ely cro"ding- and (c) ho"
"ell stoc!ed the shelves "ill be
(1) ,trategically choose time of day
and branch location
() 7rive or "al! to store () +hoose among inside teller
"indo"- drive-up lane- or 9T4
(() 2ar! car (() 2ar! car
(.) 0al! to front door (.) 0al! to front door
(5) Fet cart$ search par!ing lot if
necessary
(5) 2repare ban!ing documents
(6) 0al! aisles to find items (6) 0ait in line
(:) @ead product labels (:) A'plain ban!ing needs to teller
(or operate 9T4)
(=) +ompare prices (=) 0ait "hile transaction is
completed
(>) ,elect items (>) +hec! teller;s (or 9T4;s) "or!
(1?) ,trategically choose chec!out line
(A'press lineG +ash onlyG 0hich one
is shortestG 0hich one is fastestG
0hich cler! is fastestG etc.)
(1?) Meave ban!
Inc.
6-$# Solutions Manual
2@B<MA4 6-.6 (+B8TI8CA7)
(11) 0ait in line$ joc!ey for position if ne"
chec!out lane opens
(11) Meave par!ing lot
(1) Cnpac! cart
(1() Items are chec!ed out
(1.) Items are bagged (paper or plasticG)
(15) +arry out bags (or have bags carried
out)
(16) Moad car
(1:) Meave par!ing lot
Inc.
Managerial Accounting, 5/e 6- $$
2@B<MA4 6-.6 (+B8TI8CA7)
. ,pecifying "hether an activity is value-added or non-value added often depends on
ho" "ell the business is organi%ed for the activity. 6or e'ample- some grocery stores
ma!e it easier to par! close to the entrance than do others. Thus- getting from your
car to the front door could be value-added or non-value-added- depending on ho"
convenient the store;s par!ing lot is. The designations of D9 or 8D9 "ill vary "idely-
depending on individual e'periences.
Frocery ,tore <an!
9ctivity D9 or 8D9 9ctivity D9 or 8D9
(1)

D9 (1)

D9
()

D9 ()

D9
(()
a
D9- 8D9 (()
a
D9- 8D9
(.)
a
D9- 8D9 (.)
a
D9- 8D9
(5)
b
D9- 8D9 (5)
i
D9- 8D9
(6)
c
D9- 8D9 (6)
j
8D9
(:)
d
D9- 8D9 (:)
!
D9- 8D9
(=)
d
D9- 8D9 (=)
l
8D9
(>)

D9 (>)
m
8D9
(1?)
e
8D9 (1?)

D9
(11)
e
8D9 (11)
h
D9- 8D9
(1)

D9
(1()

D9
(1.)
f
8D9
(15)
g
8D9
(16)
g
8D9
(1:)
h
D9- 8D9
a
7epends on the configuration of the par!ing lot in relation to the design of the
building and the location of the front door.
b
Fetting a cart in the store or by the front door- D9$ searching the par!ing lot- 8D9.
c
7epends on the store layout. The author is inclined to say 8D9- since it "ould be an
improvement if grocery stores "ould adopt a standard layout (e.g.- the soda al"ays in
aisle .- or the dairy-case pi%%a al"ays in aisle 6 on the end near the registers).
d
7epends on ho" convenient the store ma!es these tas!s. Interestingly- this is one
area "here the la" has helped the consumer. ,tores no" must display unit pricing
information- and food companies must include nutritional information on the labels of
many items.
Inc.
6-$% Solutions Manual
2@B<MA4 6-.6 (+B8TI8CA7)
e
This part of grocery shopping drives the author up the "all. 0hy not have all non-
e'press-lane customers "ait in one line and then feed into the ne't available chec!out
laneG This configuration is typical of ban!s- but the author has seen it done in only
one grocery store.
f
<agging can be simultaneous "ith chec!ing out- especially if bar code scanners are
in use.
g
The store could adopt the technology of an automated material-handling system
(94/,) here. <ags of groceries "ould be placed in bins "ith the customer;s number
indicated. Then the bins "ould be transported by conveyor to a location by the front
door. 0hen the customer drove up- a store employee "ould load the groceries into
the car. The author has seen this system in operation- but rarely.
h
7epends on the configuration of the par!ing lot.
i
7epends on ho" user-friendly the documents are.
j
8D9- but a lot better than in a typical grocery store. ,ee note (e) above.
!
7epends on the ban!;s operating procedures and level of teller training.
l
Alectronic operating systems process transactions much faster than do manual
systems.
m
8D9- because "e "ouldn;t have to chec! if errors "ere e'tremely rare or
none'istent.
(. T"o stri!ing e'amples of successful reengineering are the "idespread introduction of
bar code scanners by grocery stores (and other retailers) and 9T4s (automatic teller
machines) by ban!s. The introduction of electronic ban!ing (from the home) is
another emerging e'ample of reengineering in the ban!ing industry. ,imilarly- the
introduction of shopping services and telephone ordering by grocery stores
continues the re-engineering process in this industry. 9lso- many retail companies
are dramatically reengineering their sales and billing procedures due to the ever-
increasing use of buying via the internet.
Inc.
Managerial Accounting, 5/e 6- $&
2@B<MA4 6-.: ((? 4I8CTA,)
1. +ontribution margin of lost sales (?-???) units#
@evenue.................................................................................. Q1.??K
Dariable costs#
+osts of goods sold..................................................... Q ..5?K
,elling and administrative........................................... 1.??K
Total variable costs...................................................... Q 5.5?

Cnit contribution margin....................................................... Q 6.5?

Dolume of lost sales.............................................................. ?-???

Total contribution margin of lost sales...................... Q(1(?-???)

Bvertime premiums............................................................... (.?-???)
V
@ental savings....................................................................... 6?-???

@ental income from o"ned "arehouse
(1-??? s&. ft. .:5 Q1.5?)............................................ 1(-5??

Alimination of insurance....................................................... 1.-???

Bpportunity cost of funds released from inventory
investment#
Investment in inventory............................................... Q6??-???
Interest before ta'es.................................................... .? 1?-???

Astimated before-ta' dollar savings.................................... Q (:-5??

KTotal amount on the income statement >??-??? units
V
The cost of overtime premiums- Q.?-???- is less than the additional forgone contribution
margin if the overtime is not used (15-??? units Q6.5? P Q>:-5??). Therefore- the overtime
should be used.
Inc.
6-$' Solutions Manual
2@B<MA4 6-.: (+B8TI8CA7)
. +onditions that should e'ist in order for a company to install just-in-time inventory
methods successfully include the follo"ing#
Top management must be committed and provide the necessary leadership
support in order to ensure a company"ide coordinated effort.
9 detailed system for integrating the se&uential operations of the manufacturing
process needs to be developed and implemented. @a" materials must arrive "hen
needed for each subassembly so that the production process functions smoothly.
9ccurate sales forecasts are needed for effective finished-goods planning and
production scheduling.
2roducts should be designed to use standardi%ed parts to reduce manufacturing
time and decrease costs.
@eliable vendors "ho can deliver &uality ra" materials on time "ith minimum lead
time must be identified.
Inc.
Managerial Accounting, 5/e 6- $(
2@B<MA4 6-.= (.5 4I8CTA,)
1. T"o dimensional 9<+#
Inc.
6-$) Solutions Manual
Cost Assignment "iew
@A,BC@+A +B,T,
9ssignment of resource costs
to activity cost pools
associated "ith
significant activities
#rocess "iew
9ctivity analysis
9ctivity evaluation
2A@6B@498+A
4A9,C@A,
(see re&. (.) for e'amples) @BBT
+9C,A,
(see re&. (() for
e'amples)
9+TIDITE
T@IFFA@,
(see re&. () for e'amples)
9ssignment of activity
costs to cost objects
using second-stage
cost drivers
+B,T B<JA+T,
(2roduct lines# coo!ing
utensils- table"are-
flat"are)
1 ( . 5 6
: = > 1?
11 1
1( 1. 15
16
9+TIDITIA,
2@B<MA4 6-.= (+B8TI8CA7)
. Triggers for selected activities#
9ctivity
8umber Trigger
() @eali%ation by purchasing personnel that they do not fully understand the
part specifications
(>) @eali%ation by purchasing personnel that the ordered part "ill be (or may
be) late in arriving
(11) @eceipt of order
(1) 7iscovery during inspection that parts do not meet specifications
(1() 7iscovery that parts do not satisfy intended purpose
(. 2ossible root causes#
9ctivity
8umber 2ossible @oot +ausesK
() Cnclear specifications
Incomplete specifications
+lear- but apparently "rong- specifications
Cndertrained purchasing personnel
(>) Dendor delay
7elay in placing order
6ailure by purchasing personnel to ma!e deadline clear
(11) Cse of vendor that has not been fully certified as a reliable supplier
+ritical importance of parts
(1) 4isspecification of parts
Arror by purchasing personnel in placing order
Dendor error
Inspector error
(1() 4isspecification of parts
Incomplete specifications
2oor product design
Arror by purchasing personnel in placing order
Dendor error
KThis list is not necessarily complete. Bther root causes may e'ist.
Inc.
Managerial Accounting, 5/e 6- $-
2@B<MA4 6-.= (+B8TI8CA7)
.. ,uggested performance measures#
9ctivity
8umber 2erformance 4easures
(5) 9verage price paid
(6) 8umber of vendors
8umber of vendors that are precertified as dependable
(1?) 2ercentage of orders received on time
9verage delay for delin&uent orders
(1) 8umber of orders returned
2ercentage of orders returned
(16) 9verage dollar value tied up in parts inventory
Inc.
6-%. Solutions Manual
2@B<MA4 6-.> (.? 4I8CTA,)
1. The net cash savings reali%ed by 9gri+oHs ,ervice 7ivision as a result of the just-in-
time inventory program is Q.(-???- computed as follo"s#
+ash
,avings
(loss)
6unds released from inventory investment....................... Q.??-???
Interest.................................................................................. .15 Q6?-???
Insurance savings (Q=?-??? .6?)..................................... .=-???
0arehouse rental revenue
S(=-??? s&. ft. .:5) Q.5? per s&. ft.T........................... 15-???
0arehouse rental cost# no effect........................................ U
Transferred employees# no effect....................................... U
+ontribution of lost sales ((-=?? units at Q1?.??)K............. ((=-???)
Bvertime premium (:-5?? units at Q5.6?)
V
........................... (.-???)
8et cash savings.................................................................. Q.(-???
K+alculation of unit contribution margin#
@evenue (Q6-16?-??? =?-??? units)............................... Q.??
Mess variable costs#
+ost of goods sold (Q-66?-??? =?-??? units)..................... Q>.5?
,elling and administrative e'penses (Q:??-??? =?-??? units) .5? 1.??
+ontribution margin........................................................................ Q1?.??
V
The incremental cost of Q5.6? per unit for overtime is less than the additional Q1?.??
per unit contribution for the :-5?? units that "ould have been lost sales. Therefore- the
overtime hours should be used.
Inc.
Managerial Accounting, 5/e 6- %"
2@B<MA4 6-.> +B8TI8CA7)
. 6actors- other than financial- that should be considered before a company implements
a JIT inventory program include#
+ustomer dissatisfaction# ,toc!outs of finished goods or spare parts could result
in customers; do"ntime- "hich may be costly.
7istributor relations# ,toc!outs of spare parts or finished goods can impair the
manufacturer;s image "ith its distributors- "ho represent the direct contacts "ith
the ultimate customers.
,upplier dissatisfactions# 2lacement of smaller and more fre&uent orders can
result in higher material and delivery costs from suppliers. 9dditionally- "ith
changes in their production and procurement processes- suppliers may choose to
discontinue supplying to a just-in-time customer.
+ompetition# The mar!etplace "ill determine the impact of service degradation
due to stoc!outs. <rand loyalty can deteriorate "hen service standards are
lo"ered. Therefore- it is crucial that before adopting JIT- management thin!
through all the implications. It is important to maintain the company;s prior service
standards and if possible to improve on them.
Inc.
6-%# Solutions Manual
2@B<MA4 6-5? (5? 4I8CTA,)
1. 2redetermined overhead rate P
hours labor - direct budgeted
overhead ing manufactur budgeted
P
hr ?-???
Q1-.>6-???
P Q:..=? per hr.
. There is no single correct response to this re&uirement. Bne reasonable response is
sho"n in the follo"ing table. Bverhead costs are categori%ed into nine cost pools
designated (a) through (i). +ost drivers are identified as follo"s#
(a) 2roduction (in units)
(b) @a"-material cost
(c) 6actory space
(d) 4achine hours
(e) 2roduction runs
(f) ,hipments of finished goods
(g) ,hipments of ra" materials
(h) 8umber of different ra" materials and parts used in a product
(i) Angineering specifications and change orders
(. ,ee the follo"ing table.
.. ,ee the follo"ing table.
Inc.
Managerial Accounting, 5/e 6- %$
2@B<MA4 6-5? (+B8TI8CA7)
@e&. () @e&. (() @e&. (.) @e&. (6)
Bverhead Item
+ost 2ool
and
+ost 7river
2roduction
9ctivity
+andidate
for
Alimination
7irect
+osts of an
64, +ell
,upervision.................................................. h process
4achine maintenanceUlabor..................... d process J
4achine maintenanceUmaterials.............. d process J
Alectrical po"er........................................... d process J
8atural gas (for heating)............................. c process
6actory supplies.......................................... a process J
,etup labor.................................................. e process J
Mubricants.................................................... d process J
2roperty ta'es............................................. c process
Insurance..................................................... c process
7epreciation on manufacturing
e&uipment................................................ d process J
7epreciation on truc!s and for!lifts.......... b move J J
7epreciation on material conveyors.......... b move J
<uilding depreciation.................................. c process
Frinding "heels.......................................... a process J
7rill bits........................................................ a process J
2urchasing................................................... b process J
0aste collection.......................................... a process J J
+ustodial labor............................................ c process
Telephone service....................................... h process J
Angineering design..................................... i process J
Inspection of ra" materials........................ g inspection J
@eceiving..................................................... g process J
Inspection of finished goods...................... a inspection J
2ac!aging.................................................... a process J
,hipping....................................................... f move J
0ages of parts cler!s (find parts for
production departments)....................... h storage J J
0ages of material handlers........................ b move J J
6uel for truc!s and for!lifts........................ b move J J
7epreciation on ra"-material
"arehouse............................................... b storage J
7epreciation on finished-goods
"arehouse............................................... a storage J
Inc.
6-%% Solutions Manual
2@B<MA4 6-5? (+B8TI8CA7)
5. 9ctivity accounting identifies the costs and other performance measures that pertain
to significant activities in the firm. Identification of activities and their costs helps
management to identify and e'amine non-value-added costs. 6or e'ample-
management may be able to eliminate (or significantly reduce) the cost of fuel and
depreciation for the truc!s and for!lifts and the "ages of material handlers by
installing an automated material-handling system. ,imilarly- adoption of a JIT
approach to production could enable management to eliminate or reduce the "ages of
parts cler!s and the depreciation on the t"o "arehouses.
6. ,ee the preceding table (right-hand column).
:. 9lmost all of the costs that are not traceable to an 64, cell are general facility costs-
such as factory depreciation- property ta'es- and insurance. These costs could be
allocated to departments and 64, cells on the basis of factory space usage. Then the
costs "ould be reallocated from these "or! centers to products in a t"o-stage
allocation process.
=. +omputation of pool rate#
@eceiving...................................................................................................... Q?-???
Inspection of ra" material........................................................................... ?-???
Total............................................................................................................... Q.?-???
2ool rate P
driver cost of level budgeted
cost budgeted
P
.??
Q.?-???
P Q1?? per shipment
Inc.
Managerial Accounting, 5/e 6- %&
2@B<MA4 6-51 (.? 4I8CTA,)
1. +ustomer-profitability analysis#
Trace
Telecom
+alte'
+omputer
,ales revenue...................................................................... Q1>?-??? Q1(-=??
+ost of goods sold.............................................................. =?-??? 6-???
Fross margin....................................................................... Q11?-??? Q 61-=??
,elling and administrative costs#
Feneral selling costs.................................................... Q .-??? Q 1=-???
Feneral administrative costs....................................... 1>-??? 16-???
+ustomer-related costs#
,ales activity........................................................... =-??? 6-???
Brder ta!ing............................................................. (-??? .-???
,pecial handling...................................................... .?-??? (?-???
,pecial shipping...................................................... >-??? 1?-???
Total selling and administrative costs............................... Q1?(-??? Q =.-???
Bperating income................................................................ Q :-??? Q (-?? )
Inc.
6-%' Solutions Manual
2@B<MA4 6-51 (+B8TI8CA7)
. +ustomer-profitability graph#
+ustomer Bperating Income (in dollars)
Inc.
Managerial Accounting, 5/e 6- %(

-5-???

-?-???

-15-???

-1?-???

-5-???

?

5-???

1?-???

15-???

?-???

5-???

Q:-???

Q(-??)

+ustomer

Trace

Telecom

+alte'

+omputer

2@B<MA4 6-5 (.5 4I8CTA,)
1. +ustomer-profitability profile (supporting details in the table follo"ing the profile)#
+umulative Bperating Income as a
2ercentage of Total Bperating Income
K+ustomers ran!ed by operating income.
Inc.
6-%) Solutions Manual
?O
1?O
?O
(?O
.?O
5?O
6?O
:?O
=?O
>?O
1??O
11?O
1?O
1 ( . 5 6 : =
+ustomersK
2@B<MA4 6-5 (+B8TI8CA7)
,upporting details for customer-profitability profile#
+ustomer
8umber
a
+ustomer
Bperating
2rofit
+umulative
Bperating
2rofit
+umulative
Bperating
2rofit as a
2ercentage of
Bperating
Income
(1) 8et"or!-9ll- Inc. Q>(-??? Q >(-??? ((O
() Folden Fate ,ervice 9ssociates :1-??? 16.-??? 5>O
(() Fraydon +omputer +ompany 6?-??? .-??? =?O
(.) 4id-,tate +omputing +ompany .-??? 66-??? >5O
(5) Trace Telecom
b
:-??? :(-??? >=O
(6) The +alifornia Froup 6-??? :>-??? 1??O
(:) Tele-Install- Inc. (1=-???) 61-??? >.O
(=) +alte' +omputer
c
(-??) (=-=?? =6O
a
+ustomer numbers are ran!ed by operating income.
b
6rom solution to preceding problem.
c
6rom solution to preceding problem.
. 4emorandum
7ate# Today
To# I. ,ellit- Dice 2resident for 4ar!eting
6rom# I. 4. ,tudent
,ubject# +ustomer-profitability profile
The attached customer-profitability profile sho"s that t"o of our customer relationships are
unprofitable (Tele-Install- Inc. and +alte' +omputer). 9s the profile sho"s- over half of our
operating income is generated by our t"o most profitable customer relationships- and >5
percent of our operating profit is generated by just half of our customers.
9n activity-based costing analysis of customer-related costs provided the data for the
customer-profitability analysis portrayed in the profile.
Inc.
Managerial Accounting, 5/e 6- %-
2@B<MA4 6-5( (.? 4I8CTA,)
1. @eferring to the specific ethical standards for management accountants of
competence- confidentiality- integrity- and objectivity- 4arie 0aters violated the
follo"ing standards of ethical conduct "hen she as!ed 9ndre" 6ulton to suppress
pertinent information.
Competence. 4arie 0aters- controller- has a responsibility to#
2repare complete and clear reports and recommendations after appropriate
analyses of relevant and reliable information.
2erform professional duties in accordance "ith relevant la"s- regulations- and
technical standards.
In this instance- 0aters; re&uest to 6ulton- the assistant controller- to suppress
information about the component failures is unethical. This action !eeps both 0aters
and 6ulton from performing their duties in accordance "ith technical standards and
has a favorable impact on earnings as re&uested by Jac! 4arch- vice president of
manufacturing. The reported financial information- "ith the omission- lac!s relevance
and reliability for decision ma!ing. 4anagement does not have a clear solution to
overcome the component failure problem.
Confidentiality. 7oes not apply.
+ntegrity2 0aters has a responsibility to#
@efrain from either actively or passively subverting the attainment of the
organi%ation;s legitimate and ethical objectives.
+ommunicate unfavorable as "ell as favorable information and professional
judgments or opinions.
0aters; re&uest is unethical since she has responsibilities to report all information of
use to decision ma!ers in the company. ,he should protect the overall interests and
goal attainment of @esolute Alectronics +orporation by encouraging further study of
the problem by her staff- informing her superiors of this matter- and "or!ing "ith
others to find solutions.
Inc.
6-&. Solutions Manual
2@B<MA4 6-5( (+B8TI8CA7)
Ob3ectivity. 0aters has a responsibility to#
7isclose fully all relevant information that could reasonably be e'pected to
influence intended users; understanding of the reports- comments- and
recommendations presented.
0aters; re&uest is unethical because it "ould suppress information that could
influence an understanding of the results of operations. 0aters is also not
communicating information objectively by "ithholding information about the
contingent liability.
. The steps that 9ndre" 6ulton- assistant controller- could follo" to resolve this
situation are as follo"s#
6ollo" the established policy on ethical conduct at @A+- if a policy e'ists.
6ulton has discussed the matter "ith 0aters. If a satisfactory solution is not found
and losses continue to mount- 6ulton should discuss it again "ith 0aters and may
"rite a report detailing the probable economic effects of the situation and
mentioning 0aters; re&uest to suppress the component failures.
6ulton should advise 0aters that he intends to ta!e the matter further and discuss
the issue "ith her superior. If the matter is not resolved satisfactorily- 6ulton
should continue up through higher levels in the organi%ation (eventually to the
board of directors) until the matter is resolved.
6ulton should clarify the relevant concepts "ith a confidential and objective
advisor to obtain an understanding of possible courses of action.
If- after e'hausting all internal revie" levels- the ethical conflict still e'ists- 6ulton
may have no recourse but to resign and "rite an informative memorandum to the
appropriate organi%ational representative.
A'cept "here legally prescribed- communication of such problems to authorities
or individuals not employed or engaged by the organi%ation is not considered
appropriate.
Inc.
Managerial Accounting, 5/e 6- &"
2@B<MA4 6-5. (.5 4I8CTA,)
1. ,ee the graph on the follo"ing page.
. ,ee the graph on the follo"ing page.
(. ,ee the graph on the follo"ing page.
.. ,ee the graph on the follo"ing page.
5. ,ee the graph on the follo"ing page.
6. Iai%en costing see!s to lo"er costs during the manufacturing phase through
continuous improvement in the production process. +osts are lo"ered through
constant small betterment activities- "hich every employee in the company is trying
to achieve.
<y lo"ering its costs and improving &uality through continuous improvement
efforts- the company "ill be in a better position to compete in the global mar!et on
both price and &uality.
Inc.
6-&# Solutions Manual
Inc.
Managerial Accounting, 5/e 6- &$
Inc.
6-&% Solutions Manual
2roblem 6-55 (6? minutes)
1. 2ic!"ic! 2aper +ompany# +urrent production process.
Inc.
Managerial Accounting, 5/e 6- &&
+onveyor
,hipping
Moading 7oc!
Mabeling
<uilding
Mabeled
rolls
stored
Mabeling
6or!lifts
0inding
machines
+alenders
(polishing)
@efining
area
(treatment
of
fibers)
2aper
machines
2allets
(rolls stored)
2lant
<uilding
7igester
6ibers
stored
7epressuri%ed
blo" tan!
2allets
(separated fibers
stored)
6or!lifts
/arvested trees
@ail
6lume
0oodyard
(logs stored)
2lant
<uilding 1
,mall truc!s
7ebar!er
+hipping
machines
<ins
(chips stored)
2@B<MA4 6-55 (+B8TI8CA7)
. +andidates for non-value-added costs#
(a) ,torage time. Mogs in the "oodyard and finished rolls of paperboard in the
labeling building are stored for a long time.
(b) 4ove time# 9 lot of effort and employee time is devoted to moving "or! in
process. Mogs are unloaded from the railroad cars and subse&uently reloaded
into the flume. ,mall truc!s are used to transport chips to the digester in plant
building . 6or!lifts are used to transport separated fibers to the refining area.
6inally- for!lifts are used to transport rolls of paperboard to the labeling
building.
(c) 0ait time# 0or!-in-process inventory "aits at several points in the production
process until the ne't operation is ready to receive it. 6irst- logs are stored in
the "oodyard. ,econd- chips are stored in bins near the chipping machines.
Third- fibers are stored near the digester. 6ourth- separated fibers are stored on
pallets near the depressuri%ed blo" tan!. 6ifth- unlabeled rolls of paperboard
are stored on pallets near the "inding machines. 9s the problem states- the
partially processed product sometimes "aits for t"o to three days bet"een
production operations.
(d) Mabor force# The labor force is probably larger than necessary. 4uch of this
e'cess labor is involved in material-handling operations.
(. 2lan for revised production process#
The plan for a ne" production process involves the follo"ing !ey changes#
(a) 7irect transfer of harvested trees from railroad cars to the flume.
(b) Installation of an automated material-handling system (94/,) to move all "or!
in process after it enters plant building 1.
(c) 8o storage of "or! in process bet"een production stages. Implementation of a
pull method for production scheduling.
(d) 8e" construction to house the 94/, bet"een buildings.
(e) 4ovement of the labeling machines to the other end of the labeling building-
closer to the "inding machines.
(f) @eduction of finished-goods inventory.
Inc.
6-&' Solutions Manual
2@B<MA4 6-55 (+B8TI8CA7)
9 diagram of the ne" process is sho"n on the ne't page. The steps in the ne"
process are as follo"s#
(1) /arvested trees arrive as needed for production by rail in the "oodyard and are
transferred to the flume.
() Mogs are moved by a flume into the plant "here they pass through a debar!er
and are cut up into chips.
(() The chips are transported by the 94/, to the digester.
(.) The chips then are placed in a digester- a large pressure coo!er "here heat-
steam- and chemicals convert the chips into moist fibers.
(5) The fibers are loaded onto the 94/,- "hich carries the fibers to a depressuri%ed
blo" tan!. This operation separates the fibers.
(6) The 94/, is used to carry the separated fibers to the refining area- "here the
fibers are "ashed- refined- and treated "ith chemicals and caustic substances
until they become pulp.
(:) The "ood pulp then enters the paper machines through a headbo'- "hich
distributes pulp evenly across a porous belt of forming fabric.
(=) 0ater is removed from the pulp by passing the pulp over a "ire screen.
(>) 9dditional "ater is removed from the pulp in a series of presses.
(1?) 7riers then remove any remaining "ater from the pulp.
(11) The 94/, carries the sheets of pulp to the calenders. The thin- dry sheets of
pulp are then smoothed and polished by the calendars.
(1) The paperboard is "ound into large rolls and placed on the 94/,.
(1() The rolls are labeled and stored for shipment in the labeling building. Inventory
is minimi%ed.
(1.) The rolls of paperboard are shipped to customers from the ne" loading doc! in
the labeling building.
Inc.
Managerial Accounting, 5/e 6- &(
2@B<MA4 6-55 (+B8TI8CA7)
2ic!"ic! 2aper +ompany# 8e" production process.
Inc.
6-&) Solutions Manual
,mall &uantities of
labeled rolls
stored
Mogs transferred from
railroad car to flume
/arvested trees
@ail
6lume
,hipping
8e" Moading 7oc! Moading 7oc!
Mabeling
machines
(ne" location)
+hipping
machines
9utomated
4aterial
/andling
,ystem
(94/,)
2lant
<uilding 1
2lant
<uilding 7igester
7epressuri%ed
blo" tan!
8e" construction to
connect buildings
+alenders
(polishing)
@efining
area
(treatment
of
fibers)
2aper
machines
8e"
construction
to connect
buildings
7ebar!er
0inding
machines
Mabeling
<uilding
SO*!TIONS TO ,ASES
+9,A 6-56 (.5 4I8CTA,)
1. 9 proliferation of part numbers means that the company may be ordering and stoc!ing
many more types of uni&ue parts than it needs to. Bverordering and overstoc!ing
entail more costs in purchasing- receiving- inspecting- storing- and material handling
than might other"ise be necessary.
. Mong production cycles may indicate that the production process is inefficient.
Inefficiencies- in turn- imply non-value-added costs.
(. 9n 9<+ system can be used to help reduce costs by focusing attention on the
problem of part number proliferation.
a. The division;s strategy is to be a product differentiator. It used to be a price
leader- but no" it must meet the mar!et price- since ne" competitors have
entered the mar!et.
b. 2rices are currently being set by the mar!et.
c. 4anagement;s primary need is cost reduction so that the division can meet the
mar!et-driven price. 4ore accurate product costs- "hile al"ays desirable- are
not the primary need here. The division "ill not be able to use cost-based
pricing any"ay.
d. +ost reduction is the current goal of management.
e. 2art number proliferation is (at least partially) to blame for high production
costs.
f. The design engineers- "ho strive for )engineering elegance) in their product
designs are largely to blame for part number proliferation. <y designing
products )from scratch-) engineers often specify ne" partsthat is- parts that
the division does not already use in its other products.
g. 9n 9<+ system can help solve the problem of part number proliferation by
focusing attention on it. Bne method of directing attention to this problem is to
choose a cost driver that ma!es the design engineers a"are of the implicit costs
from specifying ne" uni&ue parts in a product design.
Inc.
Managerial Accounting, 5/e 6- &-
+9,A 6-56 (+B8TI8CA7)
.. The objective is to find a cost driver that charges to a product the costs associated
"ith purchasing- receiving- inspecting- storing- and handling the parts used in the
product. 2ossible candidates for such a driver include (1) direct-material cost- ()
number of parts- and (() number of part numbers.
7river number (()- the number of part numbers (i.e.- the number of different
parts in a product)- "ould probably "or! the best. It focuses most directly on the
problem at hand# part number proliferation. <y charging a product for all the myriad
support costs that go along "ith using many different types of parts- the design
engineers "ill see more clearly the adverse cost effect of using ne" parts in a product
design. They "ill be encouraged- "hen it is possible- to use parts that the division
already stoc!s. The hope is that the design engineers "ill begin to ma!e cost-effective
trade-offs bet"een engineering elegance and product cost.
5. The ans"er to this &uestion is similar in spirit to the ans"er to re&uirement (.). The
9<+ system could use cycle time as a cost driver in assigning production-line costs
to products. Thus- the longer a product;s cycle time- the longer its assigned product
cost. In this manner- the costing system focuses attention on a problem that
management feels is unnecessarily inflating production costs.
6. In the 9erotech e'ample used in +hapters 5 and 6- the fundamental role of the 9<+
system "as to achieve more accurate product costs by eliminating (or minimi%ing) the
problem of cost distortion that is so common in traditional- volume-based product-
costing systems. The role of the 9<+ system here is fundamentally different. The
objective of the 9<+ system is to modify be)avior2 <y choosing cost drivers that
focus attention on the implicit costs of part number proliferation and long production
cycles- the system encourages employees to change the "ay they do their "or!. The
design engineers- for e'ample- are encouraged to use common parts in product
designs "henever possible rather than al"ays designing from scratch to achieve
engineering elegance.
+9,A 6-5: ((? 4I8CTA,)
1. 9fter the target price is established- in accordance "ith the ne" vehicle models;
performance characteristics- the target profit for the vehicle model must be set.
. The issues to be considered in setting a ne" vehicle modelHs target profit "ould
include the follo"ing#
The target retail price and projected sales volume.
Inc.
6-'. Solutions Manual
+9,A 6-5: (+B8TI8CA7)
The profit achieved on the current vehicle model being redesigned.
The profit achieved on other comparable vehicle models.
The level of investment in the vehicle model.
(. 9fter the target retail price and target profit have been set- the target cost is computed
as the target price minus the target profit.
.. Dalue engineering accomplishes the really hard "or! of target costing# bringing the
ultimate production cost of the ne" vehicle model into line "ith the target cost. Dalue
engineering is a cost-reduction and process-improvement techni&ue in "hich
information is collected about a product;s design and production process- and
attributes of the design and process are then e'amined to identify candidates for
improvement.
The concept of value engineering can be related to all or most of the steps
depicted in the diagram given in the problem. 6or e'ample- the styling "ould be
e'amined for "ays to trim cost "ithout diminishing the vehicle;s attractiveness. The
test model dra"ings "ould be carefully scrutini%ed for "ays to cut costs- such as
using common parts instead of uni&ue parts. 6or e'ample- an automobile
manufacturer that has 5? different headlight housings "ill incur more cost overall
than a manufacturer that uses 1? different housings. The facility and e&uipment used
in the vehicle;s production "ould be e'amined for potential improvements. The test
model (prototype) "ould be carefully scrutini%ed for potential improvements and
opportunities for cost savings. In short- every aspect of the ne" vehicle model;s
design and production process "ould be analy%ed through value engineering for
improvements and potential cost savings.
5. If the value-engineering team is unable to trim cost do"n to the target cost- the result
"ill be one of the follo"ing#
The target price "ill be reconsidered (and possibly raised).
The target profit "ill be reduced.
The basic development proposal for the ne" vehicle model "ill be revised.
9nother attempt to trim the cost using value engineering "ill be made.
Inc.
Managerial Accounting, 5/e 6- '"
,!RRENT ISS!ES IN MANA0ERIA* A,,O!NTIN0
I,,CA 6-5=
)4AJI+B 0A9DA, 4B@A TIA,--8B. 1 I8 F9@4A8T,- IT 4IF/T ,BB8 <A TB2 TAJTIMA
,BC@+A-) %4( 5A66 7%*((% 8O9*:A6- 9CFC,T 1- ???- JBAM 4IMM498.
1. 9 just-in-time inventory system !eeps minimum inventory on site. Inventory
arrives from vendors just in time to fill orders and ma!e sales.
. 9 just-in-time inventory system allo"s greater managerial control and &uic!
turnaround on changes in orders.
I,,CA 6-5>
)9, T/A TAMA+B4, A4A@FA 987 +CT +B,T,- ,A@DI+A I, B6TA8 9 +9,C9MTE-) %4(
5A66 7%*((% 8O9*:A6- J98C9@E 1>- ???- @A<A++9 <MC4A8,TAI8 987
,TA2/98IA 8. 4A/T9.
1. 4erging companies are cutting fat- automating functions that humans used to
provide- and abandoning "hite glove services in order to please an increasingly
fic!le 0all ,treet. +ommunication problems often result. ,ometimes personnel do
not communicate "ith each other- and often their technology is not compatible.
<lending company cultures- procedures and policies sometimes presents problems.
. The cost-reduction methods discussed in the chapter are designed to cut costs
"ithout any loss in customer service or perceived value. /o"ever- implementing
cost reduction programs is a challenge- and in many cases- unintended reductions
in service or value do occur.
I,,CA 6-6?
)<CIMT 6B@ T/A MB8F /9CM-) B97+:(77 5((&- JCME (- ???- 4I+/9AM 9@87T.
2accar shuns many capital costs and !eeps asset costs lo". 0hen orders slac!en-
2accar can cut costs by furloughing employees at its union and nonunion plants- rather
than idling e'pensive e&uipment. <y using labor-intensive assembly plants- it holds
do"n capital investments- and this lets 2accar cut costs "ith layoffs "hen orders
slac!en. The company does no si%e up for pea!s- but ta!es care of pea!s "ith e'tra
shifts and some selective contracting. 2accar stays lean by purchasing :5 percent of
every 2eterbilt and Ien"orth truc! from outside vendors.
Inc.
6-'# Solutions Manual
I,,CA 6-61
)9MIA89TI8F +C,TB4A@, I,8;T 9M09E, 9 <97 I7A9- 498E 6I@4, 7I,+BDA@-) %4(
5A66 7%*((% 8O9*:A6- J98C9@E :- 1>>>- @I+I <@BBI,.
6irst Cnion profiles its customers according to a formula- "hich determines a
customer;s profitability to the ban!. 7ata for the formula is gathered from a myriad of
computer systems "ith profitable customers flagged as green- unprofitable customers
flagged as red- and in bet"een customers as yello". Freen customers are given
preferred treatment- "hile red customers incur additional charges for services provided
free to green customers. ,ome customers are told they no longer are eligible for
personal treatment. 9lthough denied by management- these measures often encourage
non-profitable customers to ta!e their business else"here. 0hen this happens- profits
increase since the bottom ? percent of customers account for a drain on profits by as
much as 5? percent- "hile the top one fifth of the customer base account for a large
share of the ban!Hs profitability.
I,,CA 6-6
)T/A FMB<9M ,IJ-) B97+:(77 5((&- J98C9@E 5- 1>>>- IAIT/ 89CF/TB8 987 I9@A8
MB0@E 4IMMA@.
1. 7esigning auto models "ith computers instead of traditional drafting methods is
called computer-aided design.
. +omputer-aided design allo"s auto manufacturers to develop vastly different
models from one basic chassis. This ne" technology has cut time to mar!et by one
third. It no" ta!es about 1. 1L months to bring a ne" design to mar!et as opposed
to the previous time of about 1 months.
Inc.
Managerial Accounting, 5/e 6- '$

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CHAPTER 6

Activity-Based Management and Todays

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