Value Containers Currently Uses a Recycled Plastic to Make Containers

question 235

Essay

Value Containers currently uses a recycled plastic to make containers for online jewellery and precious coins shipments.
The cost and time standards per batch of 1,000 containers are as follows:
Plastic 250 kilograms at $5.00 per kg
Direct labour 2.0 hours at $20.00 per hour
The variable manufacturing overhead rate is based on total estimated variable manufacturing overhead of $28,125 and estimated total direct labour hours (DLH) of 18,750. Value Containers allocates its variable manufacturing overhead based on DLH.
The container management team is considering having both the container redesigned and the production process reengineered so that the plastic usage would drop by 20% overall due both to generating less scrap in the manufacturing process and using less plastic in each bottle. In addition to decreasing the amount of plastic used in producing the bottles, the additional following benefits would be realized:
a. Direct labour hours would be reduced by 10% because less scrap would be handled
in the production process.
b. Total estimated variable manufacturing overhead would be reduced by 20% because
less scrap would need to be hauled away, less electricity would be used in the production
process, and less inventory would need to be stocked.
Required:
1. Calculate the standard cost per batch of 1,000 containers using the current data (before the company makes any changes). Include direct materials, direct labour, and variable manufacturing overhead in the standard cost per unit.
2. Calculate the standard cost per batch of 1,000 containers if the company makes the changes to the container design and production process so that less plastic is used. Include direct materials, direct labour, and variable manufacturing overhead in the standard cost per unit.
3. Calculate the cost savings per batch by comparing the standard cost per batch under each scenario (current versus proposed change). Assume that the total cost to implement the changes would be $360,000. How many batches of containers would need to be produced after the change to have the cost savings total equal the cost to make the changes?

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Definitions:

Customer Orders

Requests placed by customers for the purchase of goods or services from a company.

Activity-based Costing

An accounting method that assigns costs to products or services based on the resources they consume.

Activity-based Costing

A method of accounting where costs are assigned to products or services based on the activities needed for their production.

Activity-based Costing

A costing methodology that assigns overhead and indirect costs to related products and services based on the actual consumption of each activity.