Question

Harris Systems has decided to adopt ABC. To remain competitive, Harris Systems’ management believes the company must produce the type of servers produced in Job B (from Decision Case 19-1) at a target cost of \(5,400. Harris Systems has just joined a B2B e-market site that management believes will enable the firm to cut direct materials costs by 10%.

Harris’s management also believes that a value engineering team can reduce assembly time.

Compute the assembling cost savings required per Job B-type server to meet the \)5,400 target cost.

Short answer

The business entity is required to save an assembly cost of$620.

Step-by-step solution

Definition of Activity-Based Costing

The costing method under which the cost incurred in each activity is calculated and then allocated to each product or service depending upon the activity consumed by each product or service.

Calculation of assembling cost savings

Original cost per unit in JOB B:

Particular	Amount $
Direct material per unit $\left(\frac{\$30,000}{10}\right)$	$3,000
Direct labor $\left(\frac{\$12,000}{10}\right)$	$1,200
Shipment $\left(\frac{\$1,500}{10}\right)$	$150
Material handling $\left(\frac{\$0.85\times 2,000}{10}\right)$	$170
Machine set up $\left(\frac{\$500\times 4}{10}\right)$	$200
Assembling $\left(\frac{\$80\times 200}{10}\right)$	$1,600
Total cost per server	$6,320

Calculation of cost-saving required

Particular	Amount $
Original cost	$6,320
Less: targeted cost	($5,400)
Less: Decline in direct material cost$\left(\frac{\$30,000}{10}\times 0.10\right)$	($300)
Cost-saving required	$620