John Thomas, vice-president of Mallett Company (a producer of a variety of plastic products), has been supervising the implementation of an activity-based cost management system. One of John’s objectives is to improve process efficiency by improving the activities that define the processes. To illustrate the potential of the new system to the president, John has decided to focus on two processes: production and customer service.

Within each process, one activity will be selected for improvement: materials usage for production and sustaining engineering for customer service (sustaining en-gineers are responsible for redesigning products based on customer needs and feedback). Value-added standards are identified for each activity. For materials usage, the value-added standard calls for 6 pounds per unit of output (although the plastic products differ in shape and function, their size—as measured by weight—is uniform). The value-added standard is based on the elimination of all waste due to defective molds. The standard price of materials is $5 per pound. For sustaining engineering, the standard is 58 percent of current practical activity capacity. This standard is based on the fact that about 42 percent of the complaints have to do with design features that could have been avoided or anticipated by the company.

Current practical capacity (at the end of 2000) is defined by the following requirements: 6,000 engineering hours for each product group that has been on the market or in development for five years or less, and 2,400 hours per product group of more than five years. Four product groups have less than five years’ experience, and ten product groups have more. There are 24 engineers, each paid a salary of $60,000. Each engineer can provide 2,000 hours of service per year. There are no other significant costs for the engineering activity.

Actual materials usage for 2000 was 25 percent above the level called for by the value-added standard; engineering usage was 46,000 hours. There were 80,000 units of output produced. John and the operational managers have selected some improvement measures that promise to reduce nonvalue-added activity usage by 40 percent in 2001. Selected actual results achieved for 2001 are as follows: lop4 Units produced 80,000 Materials used 584,800 Engineering hours 35,400 The actual prices paid for materials and engineering hours are identical to the standard or budgeted prices.

Required:

1. For 2000, calculate the nonvalue-added usage and costs for materials usage and sustaining engineering. Also, calculate the cost of unused capacity for the engi- neering activity.

2. Using the targeted reduction, establish kaizen standards for materials and en- gineering (for 2001).

3. Using the kaizen standards prepared in Requirement 2, compute the 2001 usage variances, expressed in both physical and financial measures, for materials and engineering (for engineering, compare actual resource usage with the kaizen standard). Comment on the company’s ability to achieve its targeted reductions. In particular, discuss what measures the company must take to capture any re- alized reductions in resource usage.