1.
Compute the new cost per pound for each product.
1.
Explanation of Solution
Environmental costs: Environmental costs are incurred due to poor environmental quality that may or may not exist.
Compute the new cost per pound for each product:
Figure (1)
Note: Pounds of packaging is the driver for both packaging and packaging treatment, therefore the rates can be combined
Working notes:
Calculate the activity rates:
Figure (2)
Note 1: Since pounds of packaging are the driver for both packaging and packaging treatment, $3,037,500 is the total costs associated with product Org AB and Org XY.
Note 2: Total engineering hours are 15,000 (11,250 for Org AB and 3,750 for Org XY).
(2)Calculate the new cost of activity-packaging materials:
(3)Calculate the new cost of activity-Energy usage:
Note:
(4)Calculate the new cost of activity-Toxin releases:
Note:
(5)Calculate the cost of packaging materials for Org AB:
Note:
(6)Calculate the cost of packaging materials for Org XY:
Note:
(7)Calculate the total costs associated with packaging materials for both products Org AB and Org XY:
(8)Calculate the cost of energy usage for Org AB:
Note:
(9)Calculate the cost of energy usage for Org XY:
Note:
(10)Calculate the total costs associated with energy usage for both products Org AB and Org XY:
(11)Calculate the cost of toxin releases for Org AB:
Note:
(12)Calculate the cost of toxin releases for Org XY:
Note:
(13)Calculate the total costs associated with toxin releases for both products Org AB and Org XY:
2.
Compute the net savings produced by the environmental changes for each product in total and on a per-unit basis and explain whether this supports the concept of eco-efficiency.
2.
Explanation of Solution
Eco-efficiency: Eco-efficiency is referred as the capability to produce competitively priced goods and services that satisfies the needs and wants of the customer while simultaneously decreasing undesirable environmental impacts.
Compute the net savings produced by the environmental changes for each product in total and on a per-unit basis:
Particulars | Org AB | Org XY | Total |
Before |
$4,065,000 (Refer to note) |
$1,710,000 (Refer to note) | $5,775,000 |
After | 2,886,250 | $1,148,750 | $4,035,000 |
Total savings (a) | $1,178,750 | $561,250 | $1,740,000 |
Pounds (b) | 7,500,000 | 18,750,000 | |
Unit savings | $0.1572 | 0.0299 |
Table (1)
Note: Refer to 23E for the value of amounts.
According to the above calculation, it is noted that eco-efficiency can be improved by improving environmental performance.
3.
Categorize the activities as prevention, detection, internal failure or external failure.
3.
Explanation of Solution
Classify the activities:
Particulars | Classification |
Excessive energy and materials | External failure |
Releasing toxins | External failure |
Operating pollution control equipment | Internal failure |
Engineering | Prevention |
Table (2)
4.
Explain the manner n which the environmental improvements can contribute for improving the competitive position of the company.
4.
Explanation of Solution
- The reduced environmental damage may also enhance product and company images, with the potential of attracting more customers. Other possible benefits that may contribute to a competitive advantage include a lower cost of capital and lower insurance costs.
- Product and company reputation can be enhanced by reducing environmental damage, with the idea of attracting more number of customers. Other probable advantage that might contribute to a competitive advantage is by including a lower cost of insurance and lower cost of capital.
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Chapter 14 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- Waterfun Technology produces engines for recreational boats. Because of competitive pressures, the company was making an effort to reduce costs. As part of this effort, management implemented an activity-based management system and began focusing its attention on processes and activities. Receiving was among the processes (activities) that were carefully studied. The study revealed that the number of receiving orders was a good driver for receiving costs. During the last year, the company incurred fixed receiving costs of $630,000 (salaries of 10 employees). These fixed costs provide a capacity of processing 72,000 receiving orders (7,200 per employee at practical capacity). Management decided that the efficient level for receiving should use 36,000 receiving orders. Required: 1. Explain why receiving would be viewed as a value-added activity. List all possible reasons. Also, list some possible reasons that explain why the demand for receiving is more than the efficient level of…arrow_forwardCleanTech manufactures equipment to mitigate the environmental effects of waste. (a) If Product A has fixed expenses of $15,000 per year and each unit of product has a $0.20 variable cost, and Product B has fixed expenses of $5000 per year and a $0.50 variable cost, at what number of units of annual production will A have the same overall cost as B? (b) As a manager at CleanTech what other data would you need to evaluate these two products?arrow_forwardQ.Magill is considering the following changes: (a) introducing quality-improvement programs whose net effect will be to reduce rework and expediting costs by 40% and materials and labor costs for servicing machine tools by 5%; (b) working with suppliers to reduce materials-procurement and inspection costs by 20% and materials-handling costs by 30%; and (c) increasing preventive-maintenance costs by 70% to reduce breakdown-maintenance costs by 50%. Calculate the effect of programs (a), (b), and (c) on value-added costs, non-value-added costs, and total costs. Comment briefly.arrow_forward
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Reorganize the monthly budgets so that quality costs are grouped in one of four categories: appraisal, prevention, internal failure, or external failure. (Essentially, prepare a budgeted cost of quality report.) Also, identify each cost as variable (V) or fixed (F). (Assume that no costs are mixed.) 2. Prepare a performance report for January that compares actual costs with budgeted costs. Comment on the companys progress in improving quality and reducing its quality costs.arrow_forwardLindell Manufacturing embarked on an ambitious quality program that is centered on continual improvement. This improvement is operationalized by declining quality costs from year to year. Lindell rewards plant managers, production supervisors, and workers with bonuses ranging from 1,000 to 10,000 if their factory meets its annual quality cost goals. Len Smith, manager of Lindells Boise plant, felt obligated to do everything he could to provide this increase to his employees. 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Besides, the policy of promptly dealing with customers who are dissatisfied could be reinstated in 3 months. In the meantime, the action would significantly reduce the costs of external failure, allowing the plant to meet its budgeted target. c. Cancel scheduled worker visits to customers plants. This program, which has been very well received by customers, enables Lindell workers to see just how the machinery they make is used by the customer and also gives them first-hand information on any remaining problems with the machinery. Workers who went on previous customer site visits came back enthusiastic and committed to Lindells quality program. Lindells quality program staff believes that these visits will reduce defects during the following year. Required: 1. Evaluate Lens ethical behavior. In this evaluation, consider his concern for his employees. Was he justified in taking the actions described? If not, what should he have done? 2. Assume that the company views Lens behavior as undesirable. What can the company do to discourage it? 3. Assume that Len is a CMA and a member of the IMA. Refer to the ethical code for management accountants in Chapter 1. Were any of these ethical standards violated?arrow_forwardGagnon Company reported the following sales and quality costs for the past four years. Assume that all quality costs are variable and that all changes in the quality cost ratios are due to a quality improvement program. Required: 1. Compute the quality costs for all four years. By how much did net income increase from Year 1 to Year 2 because of quality improvements? From Year 2 to Year 3? From Year 3 to Year 4? 2. The management of Gagnon Company believes it is possible to reduce quality costs to 2.5 percent of sales. Assuming sales will continue at the Year 4 level, calculate the additional profit potential facing Gagnon. Is the expectation of improving quality and reducing costs to 2.5 percent of sales realistic? Explain. 3. Assume that Gagnon produces one type of product, which is sold on a bid basis. In Years 1 and 2, the average bid was 400. In Year 1, total variable costs were 250 per unit. In Year 3, competition forced the bid to drop to 380. Compute the total contribution margin in Year 3 assuming the same quality costs as in Year 1. Now, compute the total contribution margin in Year 3 using the actual quality costs for Year 3. What is the increase in profitability resulting from the quality improvements made from Year 1 to Year 3?arrow_forward
- Two products, Product A and Product B, are associated with the following environmental activities and associated data: Driver data: Which of the two products has the greatest environmental impact? a. Product A because its total environmental cost is 400,000. b. Product A because it causes more waste and pollution control than Product B. c. Product B because its total environmental cost is 400,000. d. Product B because its environmental cost per unit is five times more than Product As unit environmental cost.arrow_forwardIn 20X1, Don Blackburn, president of Price Electronics, received a report indicating that quality costs were 31% of sales. Faced with increasing pressures from imported goods. Don resolved to take measures to improve the overall quality of the companys products. After hiring a consultant in 20X1, the company began an aggressive program of total quality control. At the end of 20X5, Don requested an analysis of the progress the company had made in reducing and controlling quality costs. The accounting department assembled the following data: Required: 1. Compute the quality costs as a percentage of sales by category and in total for each year. 2. Prepare a multiple-year trend graph for quality costs, both by total costs and by category. Using the graph, assess the progress made in reducing and controlling quality costs. Does the graph provide evidence that quality has improved? Explain. 3. Using the 20X1 quality cost relationships (assume all costs are variable), calculate the quality costs that would have prevailed in 20X4. By how much did profits increase in 20X4 because of the quality improvement program? Repeat for 20X5.arrow_forwardIn 20x5, Major Company initiated a full-scale, quality improvement program. At the end of the year, Jack Aldredge, the president, noted with some satisfaction that the defects per unit of product had dropped significantly compared to the prior year. He was also pleased that relationships with suppliers had improved and defective materials had declined. The new quality training program was also well accepted by employees. Of most interest to the president, however, was the impact of the quality improvements on profitability. To help assess the dollar impact of the quality improvements, the actual sales and the actual quality costs for 20x4 and 20x5 are as follows by quality category: All prevention costs are fixed (by discretion). Assume all other quality costs are unit-level variable. Required: 1. Compute the relative distribution of quality costs for each year and prepare a pie chart. Do you believe that the company is moving in the right direction in terms of the balance among the quality cost categories? Explain. 2. Prepare a one-year trend performance report for 20x5 (compare the actual costs of 20x5 with those of 20x4, adjusted for differences in sales volume). How much have profits increased because of the quality improvements made by Major Company? 3. Estimate the additional improvement in profits if Major Company ultimately reduces its quality costs to 2.5 percent of sales revenues (assume sales of 10 million).arrow_forward
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