13-20 Target costs, effect of product-design changes on product costs. Neuro Ins

Question

13-20 Target costs, effect of product-design changes on product costs. Neuro Instruments uses a manufacturing costing system with one direct-cost category (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 engineering changes made In response to competitive pressures at the end of 2016, Neuro Instruments used value-engineering tech- niques to reduce manufacturing costs. Actual information for 2016 and 2017 is as follows Setup, production-order, and materials-handling costs per batch Total manufacturing-operations cost per machine-hour Cost per engineering change 2016 2017 $ 8,900 $8,000 S 64 48 $16,000 $8,000 The management of Neuro Instruments wants to evaluate whether value engineering has succeeded in reducing the target manufacturing cost per unit of one of its products, HJ6, by 5% Actual results for 2016 and 2017 for HJ6 are: Actual Results for 2017 4,600 $ 1,300 Actual Results for 2016 Units of HJ6 produced Direct material cost per unit of HJ6 Total number of batches required to produce H Total machine-hours required to produce HJ6 Number of engineering changes made 2,700 1,400 60 20,000 24 J6 70 30,000 1. Calculate the manufacturing cost per unit of HJ6 in 2016. 2. Calculate the manufacturing cost per unit of HJ6 in 2017 3. Did Neuro Instruments achieve the target manufacturing cost per unit for HJ6 in 2017? Explain 4. Explain how Neuro Instruments reduced the manufacturing cost per unit of HJ6 in 2017 5. What challenges might managers at Neuro Instruments encounter in achieving the target cost? How might they overcome these challenges?

Explanation / Answer

1 Computation of manufacturing Cost per unit of HJ6 in 2016 Total Per Unit (Total /2700) Direct materials 2700*$1400 3780000 1400 Batch level costs $8900*60 534000 198 manufacturing operations Costs $64*20000 1280000 474 Engineering Change costs $16000*24 384000 142 Total 5978000 2214 2 Computation of manufacturing Cost per unit of HJ6 in 2017 Total Per Unit (Total /4600) Direct materials $1300*4600 5980000 1300 Batch level costs $8000*70 560000 122 manufacturing operations Costs $48*30000 1440000 313 Engineering Change costs $8000*7 56000 12 Total 8036000 1747 3 Did Neuro Instruments achieve the target manufacturing cost per unit for HJ6 in 2017? Explain. Target manufacturing Cost per unit of Hj6 in 2017 = Manufacturing cost per unit in 2016 *95% =$2214*95% =$2103.30 The actual manufacturing cost per unit of HJ6 in 2017 was $1,747. Therefore Neuro achieved its target manufacturing cost per unit 4 Explain how Neuro Instruments reduced the manufacturing cost per unit of HJ6 in 2017 Neuro also reduced the machine-hours and the number of engineering changes that were made; the quantity of the cost drivers Neuro used 7.407 (20,000 machine-hours ÷ 2,700 units) machine-hours per unit of HJ6 in 2016. And in 2017 Neuro used 6.522 machine-hours per unit of HJ6 (30,000 machine-hours $4,600 units). The engineering changes were reduced from 24 in 2016 to 7 in 2017. Neuro was successful in increasing his gains by eliminating non-value added costs and activities by using only the value engineering features that were needed

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