Cost Classification in Design Change for Graham Electronics

School: University of Wisconsin, Oshkosh - Course: ACCT 304 - Subject: Accounting

ACCT 304 Chapter 4 in-class solution Graham Electronics of England makes a radio-CD player, model CE100, with 100 components. The chief engineer at Graham has proposed a new design that would decrease the number of components to 50. In order to estimate the costs of the new design, Graham needs to understand how the following five categories of costs will change. a.Machine repairs and maintenance costs.These costs appear to be most closely related to the amount of time that the machines are operating. b.Order processing costs.Graham places two purchase orders each month with each supplier of its components. c.Testing costs.Graham tests each radio-CD player individually. d.Engineering costs.These costs are incurred to handle different problems that develop from time to time while the radio-CD players are being manufactured.The demand for engineering services seems to be most closely related to the number of components in the player. e.Costs of reworking defective output.On average, Graham has had to rework 12 radio- CD players out of every 100 manufactured. Graham's management has identified the following potential cost drivers for these costs: 1.Dollar value of purchases 2.Units of output produced 3.Manufacturing labor-hours 4.Machine-hours 5.Number of purchase orders 6.Number of components in the player 7.Number of setups 8.Number of units reworked Required: 1-2.Classify each of the five costs (a-e) as unit-level, batch-level, product-sustaining, or facility-sustaining.Identify the cost driver for each of the five costs. (see below table) 3.What is the adv of classifying costs in a hierarchy in this case?(improved cost mgmt.) Solution: Requirements 1-2 ActivityDriverClassification a. Machine repair & maintenance4Unit b. Order processing5Batch c. Testing2Unit d. Engineering6Product e. Rework8Unit Solution: Requirement 3

ACCT 304 Chapter 4 in-class solution By classifying costs (and drivers), management can improve cost estimates of new radio design.