Castle Machine Company, Inc. operates in manufacturing of picture framing machines. It produces four types of...

     

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Castle Machine Company, Inc. operates in manufacturing of picture framing machines. It produces four types of machines (A. B, C, and D). Machines are produced in standard specifications and as per customers' requirements. The materials required to manufacture those machines are purchased from sub- contractors and suppliers. The assembly of all of these parts is the main activity of the company. The company works in a traditional way and does not employ Activity Based Management (ABM) practice presently, the process objective is to providing more value to customers by giving products with reduced cost. Toward employing the activity-based management (ABM), Castle Machine Company, Inc. provides the following information: The major activities done before the point of marketing and distribution are: A- Purchasing B- Assembling C-Inventorying D- Inspection E- Engineering support F- Personnel support G- Material handling (Movements among the processes) H- Miscellaneous activities The chosen cost drivers for all major activities are: No. of cost driver (1) (2) (3) (4) (5) Name of cost driver No. of orders No. of inspection Labor hours No. of movements Stock value The total cost of each activity for the month: Activity Purchasing Assembling Inventorying Inspection Engineering support Personnel support Material handling Miscellaneous activities The volume of cost driver for the month: Cost driver No. of orders No. of inspection Labor hours No. of movements Stock value $39,648 $106,370.4 $58,944 $22,140 $177,600 $36,096 $24,480 $99,840 16 450 1,152 1,020 Total cost $192,000 Volume The labor hours are allocated to assembling, engineering support, personnel support, and Miscellaneous activities (82, 80, 470, and 520 respectively). Required 1 (4 Marks) Use the above information to fill the following table: Name of activity Cost driver Purchasing Assembling Inventorying Inspection Engineering support Personnel support Material handling Miscellaneous activities Total costs Cost of the activity Volume of cost Cost driver rate driver Required 2 (2 Marks) Is the total cost of each of the above activities is a traceable or a non-traceable cost to the four types of picture framing machines? Justify your answer The technical investigation of the above activities stated that all activities are value -added except inventorying, inspection, and material handling. In addition, the management decided to focus the improvement efforts to reduce the costs on the most critical activities using the cost weight (Percentage) criterion for each activity. Required 3 (4 Marks) Based on the cost weight (Percentage) criterion, complete the following report: Ranking among all activities Ranking among value-added activities Ranking among non-value- added activities Activities Activities Activities Engineering support 1 Assembling Misc, activities 2 3 Ranking Ranking Engineering support 1 Assembling 2 Inventorying Material handling Inspection Ranking 1 2 3 Although it is ideal to eliminate all the non-value-added activities, only top two critical non-value-added activities have been focused for improvement. Benchmarking is the preferable approach from the management side to improve not eliminate the top two critical non-value-added activities. Benchmarking includes comparing the activities of the company with the best practices followed by other companies in the industry/ or competitors. Inventorying Analyzing the inventory level and inventory related activities it is observed that presently the company is maintaining stock at a high level and there is no specifically assigned person for monitoring the stock related activities resulting in huge amount of inventory and inventory carrying cost. The Competitor is following Just-In-Time (JIT) principle for inventory purchasing using EDI (Electronic Data Interchange) system for giving purchase order and for other related communications with the vendor so that it can get the desired inventory at the desired time. Suggested improvement Castle Machine Company, Inc. Can eliminate maintaining any inventory by implementing JIT system. But to implement a perfect JIT system it needs to establish a quick system of ordering and other communication like EDI system. it needs to develop a vendors' base that have got the ability to supply required quantity, with required quality, immediately after providing the order. All these has got time and cost involvement. The implementing JIT system will result the following financial impacts: 1- the inventorying cost will be reduced to $ 3,000 per month from $ 58,944 permonth. 2- To implement the JIT system Castle Machine Company, Inc. has to invest $ 180,000 for electronics equipment (for EDI), which is to be depreciated in five years using straight-line method and $ 24,000 per year other fixed expenses. Required 4 (3 Marks) How much is the monthly net inventorying cost after implementing JIT? Required 5 (1 Mark) How much is the monthly incremental cost saving of inventorying activity after implementing JIT? Castle Machine Company, Inc. operates in manufacturing of picture framing machines. It produces four types of machines (A. B, C, and D). Machines are produced in standard specifications and as per customers' requirements. The materials required to manufacture those machines are purchased from sub- contractors and suppliers. The assembly of all of these parts is the main activity of the company. The company works in a traditional way and does not employ Activity Based Management (ABM) practice presently, the process objective is to providing more value to customers by giving products with reduced cost. Toward employing the activity-based management (ABM), Castle Machine Company, Inc. provides the following information: The major activities done before the point of marketing and distribution are: A- Purchasing B- Assembling C-Inventorying D- Inspection E- Engineering support F- Personnel support G- Material handling (Movements among the processes) H- Miscellaneous activities The chosen cost drivers for all major activities are: No. of cost driver (1) (2) (3) (4) (5) Name of cost driver No. of orders No. of inspection Labor hours No. of movements Stock value The total cost of each activity for the month: Activity Purchasing Assembling Inventorying Inspection Engineering support Personnel support Material handling Miscellaneous activities The volume of cost driver for the month: Cost driver No. of orders No. of inspection Labor hours No. of movements Stock value $39,648 $106,370.4 $58,944 $22,140 $177,600 $36,096 $24,480 $99,840 16 450 1,152 1,020 Total cost $192,000 Volume The labor hours are allocated to assembling, engineering support, personnel support, and Miscellaneous activities (82, 80, 470, and 520 respectively). Required 1 (4 Marks) Use the above information to fill the following table: Name of activity Cost driver Purchasing Assembling Inventorying Inspection Engineering support Personnel support Material handling Miscellaneous activities Total costs Cost of the activity Volume of cost Cost driver rate driver Required 2 (2 Marks) Is the total cost of each of the above activities is a traceable or a non-traceable cost to the four types of picture framing machines? Justify your answer The technical investigation of the above activities stated that all activities are value -added except inventorying, inspection, and material handling. In addition, the management decided to focus the improvement efforts to reduce the costs on the most critical activities using the cost weight (Percentage) criterion for each activity. Required 3 (4 Marks) Based on the cost weight (Percentage) criterion, complete the following report: Ranking among all activities Ranking among value-added activities Ranking among non-value- added activities Activities Activities Activities Engineering support 1 Assembling Misc, activities 2 3 Ranking Ranking Engineering support 1 Assembling 2 Inventorying Material handling Inspection Ranking 1 2 3 Although it is ideal to eliminate all the non-value-added activities, only top two critical non-value-added activities have been focused for improvement. Benchmarking is the preferable approach from the management side to improve not eliminate the top two critical non-value-added activities. Benchmarking includes comparing the activities of the company with the best practices followed by other companies in the industry/ or competitors. Inventorying Analyzing the inventory level and inventory related activities it is observed that presently the company is maintaining stock at a high level and there is no specifically assigned person for monitoring the stock related activities resulting in huge amount of inventory and inventory carrying cost. The Competitor is following Just-In-Time (JIT) principle for inventory purchasing using EDI (Electronic Data Interchange) system for giving purchase order and for other related communications with the vendor so that it can get the desired inventory at the desired time. Suggested improvement Castle Machine Company, Inc. Can eliminate maintaining any inventory by implementing JIT system. But to implement a perfect JIT system it needs to establish a quick system of ordering and other communication like EDI system. it needs to develop a vendors' base that have got the ability to supply required quantity, with required quality, immediately after providing the order. All these has got time and cost involvement. The implementing JIT system will result the following financial impacts: 1- the inventorying cost will be reduced to $ 3,000 per month from $ 58,944 permonth. 2- To implement the JIT system Castle Machine Company, Inc. has to invest $ 180,000 for electronics equipment (for EDI), which is to be depreciated in five years using straight-line method and $ 24,000 per year other fixed expenses. Required 4 (3 Marks) How much is the monthly net inventorying cost after implementing JIT? Required 5 (1 Mark) How much is the monthly incremental cost saving of inventorying activity after implementing JIT?