Nonvalue$-$Added Costs, Activity Costs, Activity Cost Reduction

John Thomas, vice president of Mallett Company $($a producer of a variety of plastic products$),$ has been supervising the implementation of an ABC management system. John wants to improve process efficiency by improving the activities that define the processes. To illustrate the potential of the new system to the president, John has decided to focus on two processes: production and customer service.

Within each process, one activity will be selected for improvement: materials usage for production and sustaining engineering for customer service $($sustaining engineers are responsible for redesigning products based on customer needs and feedback$).$ Value$-$added standards are identified for each activity. For materials usage, the value$-$added standard calls for $6$ pounds per unit of output $($the products differ in shape and function, but their weight is uniform$).$ The value$-$added standard is based on the elimination of all waste due to defective molds. The standard price of materials is $$5$ per pound. For sustaining engineering, the standard is $58\%$ of current practical activity capacity. This standard is based on the fact that about $42\%$ of the complaints have to do with design features that could have been avoided or anticipated by the company.

Current practical capacity $($at the end of $20$X$1)$ is defined by the following requirements: $6,000$ engineering hours for each product group that has been on the market or in development for $5$ years or less and $2,400$ hours per product group of more than $5$ years. Four product groups have less than $5$ years' experience, and $10$ product groups have more. Each of the $24$ engineers is paid a salary of $$60,000.$ Each engineer can provide $2,000$ hours of service per year. No other significant costs are incurred for the engineering activity.

Actual materials usage for $20$X$1$ was $25\%$ above the level called for by the value$-$added standard; engineering usage was $46,000$ hours. A total of $80,000$ units of output were produced. John and the operational managers have selected some improvement measures that promise to reduce nonvalue$-$added activity usage by $40\%$ in $20$X$2.$ Selected actual results achieved for $20$X$2$ are as follows:

Line Item Description Numerical Value

Units produced $80,000$

Materials used $584,800$

Engineering hours $35,400$

The actual prices paid for materials and engineering hours are identical to the standard or budgeted prices.

Required:

$1.$ For $20$X$1,$ calculate the nonvalue$-$added usage and costs for materials usage and sustaining engineering.