Medical Instruments uses a manufacturing costing system with one direct cost cat
ID: 2344319 • Letter: M
Question
Medical Instruments uses a manufacturing costing system with one direct cost catagory ( direct materials) and three indirect cost categories:a. Setup, production order, and materials handling costs that vary with the number of batches.
b. Manufacturing operations costs that vary with machine hours
c. costs of engineering changes that vary with the number of engineeering changes made.
In response to competitive pressures at the end of 2010, Medical instruments used value engineering techniques to reduce manufacturing costs. Actual information for 2010 and 2011 is as follows:
2010 2011
Setup, production order, and materials handling costs per batch $8,000 $7,500
Total manufacturing opeartions cost per machine hour $55 $50
Cost per engineering change $12,000 $10,000
The management of medical instruments wants to evaluate whether value engineering has succeeded in reducing the target manufacturing costs per unit of one of its products, HJ6, by 10%.
Actual results for 2010 and 2011 for HJ6 are as follows:
Actual results Actual results
for 2010 for 2011
Units of HJ6 produced 3,500 4,000
Direct materials costs per unit of HJ6 $1,200 $1,100
Total number of batches required to produce HJ6 70 80
Total machine hours required to produce HJ6 21,000 22,000
Number of engineering changes made 14 10
1. Calculate the manufacturing cost per unit of HJ6 in 2010.
2. Calculate the manufacturing cost per unit of HJ6 in 2011.
3. Did Medical Instruments achieve the target manufacturing cost per unit for HJ6 in 2011? explain.
4. explain how Medical Instruments reduced the manufacturing cost per unit of HJ6 in 2011.
Explanation / Answer
2010 2011
Direct materials $4,200,000 $4,400,000
Setup, production order &
materials handling $560,000 $600,000
Manufacturing operation $1,155,000 $1,100,000
Engineering changes $168,000 $100,000
Total manufacturing costs $6,083,000 $6,200,000
No. of units produced 3,500 4,000
Cost per unit of HJ $1,738 $1,550
1. Calculate the manufacturing cost per unit of HJ6 in 2010. $1,738
2. Calculate the manufacturing cost per unit of HJ6 in 2011. $1,550
3. Did Medical Instruments achieve the target manufacturing cost per unit for HJ6 in 2011? explain.
Reduction in total manufactring cost = $1,738 - $1,550 = $188
% of reduction in total manufactring cost = $188 / $1,738 = 10.82%
Yes Medical Instruments achieved the target manufacturing cost per unit for HJ26.
4. explain how Medical Instruments reduced the manufacturing cost per unit of HJ6 in 2011.
2010 2011 Diff.
Units 4,000 4,000
Direct materials $4,800,000 $4,400,000 $400,000
Setup, production order &
materials handling $640,000 $600,000 $40,000
Manufacturing operation $1,320,000 $1,100,000 $220,000
Engineering changes $192,000 $100,000 $92,000
Total manufacturing costs $6,952,000 $6,200,000 $752,000
Direct material cost reduced by $100 per unit $400,000 / 4,000
Setup Prod. cost reduced by $10 per unit $40,000 / 4,000
Operation cost reduced by $55 per unit $220,000 / 4,000
Eng. changes reduced by $23 per unit $92,000 / 4,000
Total reduction $188 per unit