Value Stream Product Costing, ABC, and DBC Brasher Company is transitioning to a lean manufacturing system and has just finalized two order fulfillment value streams. One of the value streams has two products, and the other has four products. The two-product value stream produces precision machine parts and the four-product value stream produces machine tools. Before moving to the value-stream structure, Brasher had a well-developed ABC system (one that used all duration drivers) and had experienced good success with the more accurate product costs. Management wanted to be sure that the average costing approach of value- stream costing did not produce distorted product costs. Accordingly, expected weekly activity data were provided for the two-product value streams to see how well average costing worked (see below); however, management did not want to continue using ABC because of its intense data demands and the cost of updating as changes unfolded due to lean practices. In the table below, the driver for each activity is a duration driver. Order processing, for example, uses hours available for processing orders; purchasing uses hours available for processing purchases, etc. Machine Parts Value Stream For the Coming Week Conversion Part M15 Part M78 Cost (hours used) (hours used) $ 36,000 600 1,800 72,000 200 300 Total Activity Hours Activity 2,400 Order processing Purchasing 500 Lathe 108,000 480 320 800 Milling 200,000 800 1,200 2,000 Drilling 144,000 720 1,680 2,400 Assembly 40,000 1,200 800 2,000 Inspection 20,000 800 200 1,000 18,000 600 200 800 Shipping Invoicing 32,000 700 800 1,500 Totals $670,000 6,100 7,300 13,400 During the week, the machine parts value stream pects to produce and ship 10,000 units of M15 and 30,000 units of M78. Since materials cost is calculated separately, the main concern is with the unit conversion cost. Round your answers to two decimal places. Required: 1. Calculate the average unit conversion cost for the two machine parts. 16.75 per unit 2.a Calculate the conversion cost per unit for each part, using ABC. Part M15 $ 33.74 x per unit Part M78 $ 11.39 x per unit 2.b Comparing ABC unit cost with the average cost, what would you recommend? The products use the same sequence of operations and consume them in quite different proportions so the average cost is not a good unit cost indicator for this value stream. 3.a Calculate the cycle time for each product. Part M15 hour per unit Part M78 hour per unit 3.b Calculate the conversion cost per unit, using DBC Part M15 $ 30.5 per unit Part M78 $ 12.17 X per unit
