Continuous Improvement (Kaizen) Costing (LO4)

Patel Company does contract manufacturing of compact video cameras. At its Pacific plant, cost control has become a concern of management. The actual costs per unit for the years 2011 and 2012 were as follows:

2011 ae 2012 Direct materials

|P ERCE Rey PR See ee ee $ 4.00 $ 3.90 LETTE SEM su os HGR SIS ee 17.00 17.20 Electrical component set ......... 6.00 5.40 PRUE Kame ech cocci ates ics « 11.00 10.00 DIRSC UEC es. Slee eee eee 32.00 (1.6 hours) 30.00 (1.5 hours)

Indirect manufacturing costs Weta le mie can sioner come Sia ks trans 7.50 7.10 FIXOC Peete eens care Sioat Sine aayg 4 2.00 (100,000 1.90 (120,000 unit base) unit base)

The company manufactures all of the camera components except the lens sets, which it purchases from several vendors. The company has used target costing in the past but has not been able to meet the very competitive global pricing. Beginning in 2012, the company implemented a continuous improvement program that requires cost reduction targets.

Required

a. If continuous improvement (Kaizen) costing sets a first-year target of a 5 percent reduction of the 2011 base, how successful was the company in meeting 2012 per unit cost reduction targets?

Support your answer with appropriate computations.

b. Evaluate and discuss Patel’s use of Kaizen costing.

 LO.1