Renlund Company is transitioning to a lean manufacturing system and has just finalized two order fulfillment value streams. One of the value streams has two products, and the other has four products. The two-product value stream produces precision machine parts, and the four-product value stream produces machine tools. Before moving to the value-stream structure, Renlund had a well-developed ABC system (one that used all duration drivers) and had experienced good success with the more accurate product costs. Management wanted to be sure that the average costing approach of value-stream costing did not produce distorted product costs. Accordingly, the most recent weekly activity data were provided for the two-product value stream to see how well average costing worked (see next); however, management did not want to continue using ABC because of its intense data demands and the cost of updating as changes unfolded due to lean practices. In the following table, the driver for each activity is a duration driver (time driven).

During the week, the machine parts value stream expects to produce and ship 15,000 units of S55 and 45,000 units of K66. Since materials cost is calculated separately, the main concern is with the unit conversion cost.

Required:

1. Calculate the average unit conversion cost for the two machine parts. Is this calculation using the value-stream average costing model an example of predictive or descriptive data analytic types?

2. Calculate the conversion cost per unit for each part, using ABC. Comparing ABC unit cost with the average cost, what would you recommend? Which data analytic type best fits the comparison of unit costs produced by the two different product costing models?

3. Calculate the conversion cost per unit using DBC (you will first need to calculate the cycle time for each product). Based on this outcome and the results of Requirements 1 and 2, what would you recommend to the management of Renlund Company?
What data analytic types are being used in this analysis?

4. Intrigued by the DBC product costing model, the management of Renlund wants to know the effect on unit costs if the non-value-added activity of inspection is eliminated. Using DBC, provide the answer that Renlund’s management is seeking. (Calculate cycle time to three decimal places.) Assume the same units produced and shipped for each product. Which data analytic type is being used?

Transcribed Image Text:

Activity Order Processing Purchasing Lathe Milling Drilling Assembly Inspection Shipping Invoicing Totals Machine Parts Value Stream For the Coming Week Conversion Cost $ 54,000 108,000 162,000 300,000 216,000 105,000 60,000 27,000 48,000 $1,080,000 Part S55 (hours used) 900 300 720 1,200 1,080 1,800 2,400 900 1,050 10,350 Part K66 (hours used) 2,700 450 480 1,800 2,520 1,200 600 300 1,200 11,250 Total Activity Hours 3,600 750 1,200 3,000 3,600 3,000 3,000 1,200 2,250 21,600