Exam 21: Strategic Cost Management

____ calls for establishing cost reduction targets for products or services that an organization is currently providing to customers.

Palms, SA., sells one of its products for £80 each. Sales volume averages 2,000 units per year. Recently, its main competitor reduced the price of its product to £56. Palms expects its sales to drop dramatically unless it matches the competitor's price. In addition, the current profit per unit must be maintained. Information about the product (for production of 2,000) is as follows: SQ AQ Actual Cost Materials (kgs) 9,800 10,000 £40,000 Labour (hours) 2,400 2,500 20,000 Setups (hours) -0- 400 12,000 Material handling (moves) -0- 700 4,000 Warranties (number repaired) -0- 500 20,000 a.Calculate the target cost for maintaining current market share and profitability. b.Calculate the nonvalue-added cost per unit. c.If nonvalue-added costs can be reduced to zero, can the target cost be achieved?

Figure 21-5 At the beginning of this year, Sammie Company installed a JIT purchasing and manufacturing system. The following information has been gathered about one of the company's products: Current Year Theoretical annual capacity 2,000 Actual production 1,800 Production hours available 1,000 Scrap (kgs) 200 Materials used (kgs) 6,400 Actual cost per unit 14 Days of inventory 3 Number of defective units 30 -Refer to Figure 21-5. Sammie's theoretical cycle time for this year would be

Figure 21-3 A firm's warranty costs are £125,000 per year. A competitor's warranty costs are £25,000 per year. -Refer to Figure 21-3. The nonvalue-added costs are

Which of the following is NOT a prevention activity?

Figure 21-6 Brad Company developed the following budgeted life-cycle income statement for two proposed products. Each product's life cycle is expected to be two years. Product A Product B Total Sales £200,000 £200,000 £400,000 Cost of goods sold -120,000 -130,000 250,000 Gross profit £80,000 £70,000 £150,000 Period expenses: Research and development (70,000) Marketing (50,000) Life-cycle income £30,000 A 10 per cent return on sales is required for new products. Because the proposed products did not have a 10 per cent return on sales, the products were going to be dropped. Relative to Product B, Product A requires more research and development costs but fewer resources to market the product. Sixty per cent of the research and development costs are traceable to Product A, and 30 per cent of the marketing costs are traceable to Product A. -Refer to Figure 21-6. If research and development costs and marketing costs are traced to each product, life-cycle income for Product A would be

In 2006, Style, SA., instituted a quality improvement program. At the end of 2007, the management of the company requested a report to show the amount saved by the measures taken during the year. The actual sales and actual quality costs for 2006 and 2007 are as follows: 2006 2007 Sales £125,000 £150,000 Scrap 3,750 3,750 Rework 5,000 2,500 Training program 1,250 1,500 Consumer complaints 2,500 1,250 Lost sales, incorrect labeling 2,000 - Test labour 3,000 2,000 Inspection labour 6,250 6,000 Supplier evaluation 3,750 3,250 a.Classify each cost as variable or fixed with respect to sales and compute the variable cost ratio. Be careful-costs may change because of quality improvement, not cost behaviour. b.How much did profits increase because of quality improvements made in 2007, assuming all reductions in quality costs are attributable to quality improvements?

The majority of the product cost is "locked in" during which of the following life-cycle stages?

Benchmarking

Warranty work is a(n)

The demand-pull system requires goods to be manufactured based on the

Figure 21-5 At the beginning of this year, Sammie Company installed a JIT purchasing and manufacturing system. The following information has been gathered about one of the company's products: Current Year Theoretical annual capacity 2,000 Actual production 1,800 Production hours available 1,000 Scrap (kgs) 200 Materials used (kgs) 6,400 Actual cost per unit 14 Days of inventory 3 Number of defective units 30 -Refer to Figure 21-5. Sammie's actual cycle time for this year would be

Using the abbreviations listed below, indicate for each of the costs whether the cost should be classified as: = Prevention = Appraisal = Internal Failure = External Failure = None of the above 1. Cost of recalling defective products 2. Design reviews 3. Downtime due to defects 4. Field testing 5. Inspection of work in process 6. Lost sales due to poor product performance 7. Process acceptance 8. Quality training programs 9. Scrap 10. Supplier evaluations

Figure 21-7 At the beginning of the year, Andrew Company initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the following data were collected for the current and preceding years: Freceding Year Current Year Sales £2,400,000 £2,400,000 Quality training 30,000 48,000 Material inspections 7,000 8,000 Scrap 48,000 30,000 Rework 60,000 48,000 Product inspection 10,000 12,000 Product warranty 36,000 24,000 -Refer to Figure 21-7. If quality costs had been reduced to 2.5 per cent of sales in the current year, profits would have increased by

Figure 21-7 At the beginning of the year, Andrew Company initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the following data were collected for the current and preceding years: Freceding Year Current Year Sales £2,400,000 £2,400,000 Quality training 30,000 48,000 Material inspections 7,000 8,000 Scrap 48,000 30,000 Rework 60,000 48,000 Product inspection 10,000 12,000 Product warranty 36,000 24,000 -Refer to Figure 21-7. For the current year, external failure costs are what percentage of sales?

A technique for improving performance of activities and processes that searches for best practices is called

____ focuses on nonvalue-added activities.

With JIT manufacturing, the major variable cost remaining is

Inspecting the components and the finished product is

In comparison to a traditional environment, a JIT environment has more overhead assigned by