Concept explainers
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 techniques to reduce
2016 | 2017 | |
Setup, production-order, and materials-handling costs per batch | $ 8,900 | $8,000 |
Total manufacturing-operations cost per machine-hour | $ 64 | $ 48 |
Cost per engineering change | $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 2016 | Actual Results for 2017 | |
Units of HJ6 produced | 2,700 | 4,600 |
Direct material cost per unit of HJ6 | $ 1,400 | $ 1,300 |
Total number of batches required to produce HJ6 | 60 | 70 |
Total machine-hours required to produce HJ6 | 20,000 | 30,000 |
Number of engineering changes made | 24 | 7 |
- 1. Calculate the manufacturing cost per unit of HJ6 in 2016.
Required
- 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?
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