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How To Calculate Value

This document provides information to calculate value-stream product costs for Holland Company. It includes net hours, materials, wages, and other costs for various production activities. It then provides three examples to calculate unit costs using: 1) total costs divided by total units for a single product value stream, 2) allocating materials costs and calculating average conversion costs, and 3) duration based costing (DBC) using conversion cost rates and cycle times. DBC is considered more accurate when products are not homogeneous, as it better approximates activity-based costing assignments.

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Meilin Medrana
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Download as DOCX, PDF, TXT or read online on Scribd
75 views

How To Calculate Value

This document provides information to calculate value-stream product costs for Holland Company. It includes net hours, materials, wages, and other costs for various production activities. It then provides three examples to calculate unit costs using: 1) total costs divided by total units for a single product value stream, 2) allocating materials costs and calculating average conversion costs, and 3) duration based costing (DBC) using conversion cost rates and cycle times. DBC is considered more accurate when products are not homogeneous, as it better approximates activity-based costing assignments.

Uploaded by

Meilin Medrana
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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How to Calculate Value-Stream Product Costs

HOLLAND COMPANY
This Week, October 8
Salaries/ Total 
Net Hours Materials Wages Machining Other Cost
Order processing 800 18,000 18000
Production planning 50 2,000 2000
Purchasing 400 11,000 11000
Cutting 1000 100,000 37,500 36,000 18,000 191500
Welding and drilling 1200 50,000 42,000 42,000 12,000 146000
Assembly 250 75,000 25,000 10,000 15,000 125000
Testing 300 8,500 2,000 10500
Packaging and shipping 300 9,000 9000
Invoicing 700     12,000     12000
5000   225000 165000 88000 47000 525000

During the week of October 8, Holland Company produced and shipped 2,000 units of
Model X12 and 8,000 units of Model Y35, for a total of 10,000 units.  Model X12 has a
cycle time of 1.04 hours, and Model Y35 has a cycle time of 0.34 hour.
Required:
1.  Assume that the value-stream costs and total units shipped apply only to one model
( a single-product value stream).  Calculate the unit cost, and comment on its accuracy.
Answer:
Unit Cost = $525,000/10,000 = $52.50 per unit.  The cost is very accurate, as the value
stream is dedicated to one product and its costs all belong to that product.
 
2.  Assume that Model X12 is responsible for 50% of the materials cost.  Calculate the
unit cost for Model X12 and Y35, and comment on its accuracy.  Explain the rationale
for using units shipped instead of units produced in the calculation.
Answer:
First, the unit materials cost is calculated separately:
                       Model X12 :  $112,500/2,000 = $56.25
                      Model Y35:  $112,500/8,000 = $14.06
Next, the average unit conversion cost is calculated.  $300,000 / 10,000 = $30.
                      Conversion Cost = Total Cost - Materials Cost
                                                            = $525,000 - $225,000 = $300,000
Finally, the unit cost is computed. (sum of materials and average conversion cost).
                                  Model X12:  $56.25 + $30 = $86.25
                                 Model Y35: $14.06 + $30 = $44.06
The accuracy of the unit cost depends on the accuracy of the average unit conversion
cost, which depends on the homogeneity of the products within the value stream.  Using
units shipped for the unit calculation motivates managers to reduce inventories.
 
3.  Calculate the unit cost for the two models, using DBC.  Explain when and why this
cost is more accurate that the unit cost calculated in Requirement 2.
Answer:
First, calculate the conversion cost rate:
                Conversion Cost Rate = Conversion Cost / Total Net Production Hours
                                                                    = $300,000 / 5,000
                                                                    = $60 per hour
Next, calculate the unit conversion costs for each product:
                 Conversion Cost per Unit = Conversion Rate x Cycle Time
                               Model X12:  $60 x 1.04  =  $62.40
                               Model Y35:  $60 x 0.34 =   $20.40
Finally, add the unit materials cost:
                              Model X12:  $56.25 + $62.40 = $118.65
                              Model Y35:  $14.06 + $ 20.40 = $34.46
Duration based costing (DBC) should be used if the products are not homogeneous
products.  It is more accurate, as it approximates ABC assignments.
 

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