Problem 3 - Operations Management

183 CHAPTER 5 Costs: The Price of Value Creation DISCUSSION AND EXPLORATION 1. What are the total costs of ownership for an automobile! Are those costs the sime for students and nonstudents? How do those costs differ from one automobile to an- other? How important are those costs when considering an automobile purchase? Should parking costs be included as part of the costs of ownership? 2. Identify the major categories of cost for a university. Create alternative plans for cal- culating the cost per student. How does the plan change if the cost object becomes a "student graduated"? If the cost object is a "chemistry major graduated," would the cost per unit be different from that of a business student graduated? Why? If the costs per student are different, should tuition be different? 3. Labor costs are often a concern for services and manufacturers. Employee salaries are the most frequently discussed labor costs, but there are others. Quite often, salaries are not increased, because of the impact increases would have on labor costs. Some might argue that higher salaries would reduce total labor costs in the long term. How could this be true? Be sure to consider non financial costs. 4. Much of the effort to improve cost measurement, including activity-based costing, focuses on providing more accurate ways to allocate costs to individual products Why is it important to be able to know what a specific product costs? Which types of cost will be the most difficult to deal with? 5. Nonfinancial costs are often the most difficult to include in decision-making processes. What nonfinancial costs are most often part of financial decisions you must make? In jobs you have had, have you observed decisions made that ignored nonfinancial costs! Describe them. PROBLEMS PM Solutions to odd-numbered problems are located on the text's Online Center (http: mhhe.com/openow3e). 1. Mayflower Department Store offers a gift-wrapping service for its customers. Ribbon is the most expensive component of gift wrapping and must be controlled for both the cost of the service and the amount used. The current cost for ribbon is $0.48 per inch. The current usage of ribbon is 10 inches per package. The standard usage is 11 inches per package, with a standard price of $0.55. What are the price, usage, and total variances for the ribbon? 2. Decy Cookies sells chocolate chip cookies on campus. Of course, chocolate chips are the most important ingredient for taste and cost. The standard usage of chips is li chipset Cokie. The standard price for a bag of chocolate chips is $2.05. De has found the students like more than the standard amount of chocolate chips in the cookies She therefore started to make her cookies with 15 chips. The store she buys the chocolate chips from has a sale on the chips, selling them for $1.89 per bag. There are 400 chins in a bag. Calculate the price variance, usage variance, and total variance. 3. Bill Hose is a project supervisor for Regal Homes, a builder of new houses. As the project supervisor, Bill must keep a careful eve on the number of worker hours put into the construction of a new house. The standard number of worker-hours to come plete a house is 1,075 and the standard hourly wage is $20.00. The current house has taken only 1.010 worker-hours and the workers are under contract for $20.00 per hour. What are the price, usage, and total variances for this house? 4. Stan operates a copy shop. The copy machines cost $0.05 per copy to operate, ex- cluding the paper. Stan normally pays $2.90 per 500-sheet ream of paper, although he currently is buying paper from a wholesaler for only $2.50 per ream. When his ind indirect costs costs of resources ered when business 183 CHAPTER 5 Costs: The Price of Value Creation DISCUSSION AND EXPLORATION 1. What are the total costs of ownership for an automobile! Are those costs the sime for students and nonstudents? How do those costs differ from one automobile to an- other? How important are those costs when considering an automobile purchase? Should parking costs be included as part of the costs of ownership? 2. Identify the major categories of cost for a university. Create alternative plans for cal- culating the cost per student. How does the plan change if the cost object becomes a "student graduated"? If the cost object is a "chemistry major graduated," would the cost per unit be different from that of a business student graduated? Why? If the costs per student are different, should tuition be different? 3. Labor costs are often a concern for services and manufacturers. Employee salaries are the most frequently discussed labor costs, but there are others. Quite often, salaries are not increased, because of the impact increases would have on labor costs. Some might argue that higher salaries would reduce total labor costs in the long term. How could this be true? Be sure to consider non financial costs. 4. Much of the effort to improve cost measurement, including activity-based costing, focuses on providing more accurate ways to allocate costs to individual products Why is it important to be able to know what a specific product costs? Which types of cost will be the most difficult to deal with? 5. Nonfinancial costs are often the most difficult to include in decision-making processes. What nonfinancial costs are most often part of financial decisions you must make? In jobs you have had, have you observed decisions made that ignored nonfinancial costs! Describe them. PROBLEMS PM Solutions to odd-numbered problems are located on the text's Online Center (http: mhhe.com/openow3e). 1. Mayflower Department Store offers a gift-wrapping service for its customers. Ribbon is the most expensive component of gift wrapping and must be controlled for both the cost of the service and the amount used. The current cost for ribbon is $0.48 per inch. The current usage of ribbon is 10 inches per package. The standard usage is 11 inches per package, with a standard price of $0.55. What are the price, usage, and total variances for the ribbon? 2. Decy Cookies sells chocolate chip cookies on campus. Of course, chocolate chips are the most important ingredient for taste and cost. The standard usage of chips is li chipset Cokie. The standard price for a bag of chocolate chips is $2.05. De has found the students like more than the standard amount of chocolate chips in the cookies She therefore started to make her cookies with 15 chips. The store she buys the chocolate chips from has a sale on the chips, selling them for $1.89 per bag. There are 400 chins in a bag. Calculate the price variance, usage variance, and total variance. 3. Bill Hose is a project supervisor for Regal Homes, a builder of new houses. As the project supervisor, Bill must keep a careful eve on the number of worker hours put into the construction of a new house. The standard number of worker-hours to come plete a house is 1,075 and the standard hourly wage is $20.00. The current house has taken only 1.010 worker-hours and the workers are under contract for $20.00 per hour. What are the price, usage, and total variances for this house? 4. Stan operates a copy shop. The copy machines cost $0.05 per copy to operate, ex- cluding the paper. Stan normally pays $2.90 per 500-sheet ream of paper, although he currently is buying paper from a wholesaler for only $2.50 per ream. When his ind indirect costs costs of resources ered when business