Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed

PP PREV PREV Difference = €135.50 Difference = € 66.30 The sources of the cost reductions in the redesigned products are PP a

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PP PREV PREV Difference = €135.50 Difference
= € 66.30 The sources of the cost reductions in the redesigned products are
PP
a
Reduction indirect materials costs
€26.30
€29.00
b
Changes in design
Reduced materials handling costs due to fewer parts
(85 − 71); (46 − 39)
× €1.20 16.80 8.40 Reduced assembly time
(3.2 − 2.1); (1.9 − 1.6)
× €40 44.00 12.00 Reduced insertion of parts

(49
− 59)
× €0.70 + (36 − 12) × €2.10 43.40

(31
− 29)
× €0.70 + (15 − 10) × €2.10 11.90 Reduced quality testing
(1.4 − 1.2); (1.1 − 0.9)
× €25 5.00 5.00

€135.50
€66.30 Note that the reduced costs for insertion of parts come from two sources (a) a reduction in total number of parts to be inserted and (ban increase in the percentage of parts inserted by the lower-cost machine method.

Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012
4
The €12 reduction in cost per hour of assembly time (from €40 to €28) reduces product costs as follows PREV hours = €25.20. The new total manufacturing product cost is €621.70.
(€646.90 − €25.20) PREV hours = €19.20. The new total manufacturing product cost is €418.50.
(€437.70 − €19.20) The reduction in the assembly management activity rate further reduces the cost of PREV below the target cost. It also makes it more likely that PREV will achieve its target cost.

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