Chapter 19: Q19-15RQ (page 1063)
Explain how the work cell manufacturing layout increases productivity.
Work cell manufacturing layout increases productivity by eliminating work in process, reducing wastage, and having less supervision in the manufacturing process.
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“Prevention is much cheaper than external failure.” Do you agree with this statement? Why or why not?
Question:Stella, Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Stella’s senior managers expect the engineering work to reduce appraisal, internal failure, and external failure activities. The predicted reductions in activities over the two-year life of the skateboards follow. Also shown are the predetermined overhead allocation rates for each activity.
Activity Predicted Predetermined
Reduction in Overhead Allocation
Activity Units Rate per Unit
Inspection of incoming raw materials 390 \( 44
Inspection of finished goods 390 19
Number of defective units discovered in-house 1,200 50
Number of defective units discovered by customers 325 72
Lost profits due to dissatisfied customers 75 102
Requirements
2. Stella spent \)103,000 on design engineering for the new skateboard. What is the net benefit of this “preventive” quality activity?
Willitte Pharmaceuticals manufactures an over-the-counter allergy medication. The company sells both large commercial containers of 1,000 capsules to health care facilities and travel packs of 20 capsules to shops in airports, train stations, and hotels. The following information has been developed to determine if an activity-based costing system would be beneficial:
Activity Estimated Estimated Quantity
Indirect Cost Allocation Base of Allocation Base
Materials handling \( 95,000 Number of kilos 19,000 kilos
Packaging 200,000 Number of machine hours 5,000 hours
Quality assurance 112,500 Number of samples 1,875 samples
Total indirect costs \) 407,500
Actual production information includes the following:
Commercial Containers Travel Packs
Units produced 2,400 containers 50,000 packs
Weight in kilos 9,600 5,000
Machine hours 1,680 500
Number of samples 240 750
Requirements
3. Use the predetermined overhead allocation rates to compute the activity-based costs per unit of the commercial containers and the travel packs. Round to two decimal places. (Hint: First compute the total activity-based costs allocated to each product line, and then compute the cost per unit.)
Clason, Inc. manufactures door panels. Suppose Clason is considering spending the following amounts on a new total quality management (TQM) program:
___________________________________________________________________
Strength-testing one item from each batch of panels \( 68,000
Training employees in TQM 27,000
Training suppliers in TQM 39,000
Identifying suppliers who commit to on-time delivery of
perfect-quality materials 58,000
Clason expects the new program would save costs through the following:
___________________________________________________________________
Avoid lost profits from lost sales due to disappointed customers \) 86,000
Avoid rework and spoilage 63,000
Avoid inspection of raw materials 57,000
Avoid warranty costs 15,000
Requirements
1. Classify each cost as a prevention cost, an appraisal cost, an internal failure cost, or an external failure cost.
2. Should Clason implement the new quality program? Give your reason.
Answer
The following information is provided for Orbit Antenna Corp., which manufactures two products: Lo-Gain antennas and Hi-Gain antennas for use in remote areas.
Activity Cost Allocation Base
Setup \( 58,000 Number of setups
Machine maintenance 30,000 Number of machine hours
Total indirect manufacturing costs \) 88,000
Lo-Gain Hi-Gain Total
Direct labor hours 1,200 3,800 5,000
Number of setups 40 40 80
Number of machine hours 3,000 2,000 5,000
Orbit Antenna plans to produce 125 Lo-Gain antennas and 225 Hi-Gain antennas.
Requirements
1. Compute the indirect manufacturing cost per unit using direct labor hours for the single plantwide predetermined overhead allocation rate.
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