Optimizing Cost Management Strategies
In this analysis of Calvert's cost management, explore the breakdown of value-added, non-value-added, and grey area costs in 2013. Discover actions to reduce costs and understand the impact of misclassifying costs. Gain insights into optimizing operational efficiency and profitability.
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PRICING DECISIONS AND PRICING DECISIONS AND COST MANAGEMENT COST MANAGEMENT Group 8 15432246 QIU Jiayue YE Ying 15415295 MA Yanpei ZHANG Liqing ZHAO Lu 15430650 YAO Siyun 15408418 15408434 15411435
1, How much of the total costs in 2013 are value-added, non-value-added, or in the gray area between? Explain your anwsers briefly. What actions can Calvert take to reduce its costs?
Income Statement for 2013 Revenues $701,250 Salaries of professional staff (7,500 hours * $52 per hour) 390,000 Travel 15,000 Administrative and support costs 171,600 Total costs 576,600 Operating income $124,650
The percentage of time spent by professional staff on various activities: Making calculation and preparing drawings for clients 77% Checking calsulations and drawings 3 Correcting errors found in drawings (not billed to clients) 8 Making changes in response to client requests (billed to clients) 5 Correcting own errors regarding building codes (not billed to clients) 7 Total 100%
Value- Added Non-Value- Added Grey Area Total Making calculations and preparing drawings for clients 77%*390,000 =$300,300 $300,300 Checking calculations and drawings 3%*390,000 =$11,700 11,700 Correcting errors found in drawings 8%*390,000 =$31,200 31,200 Making changes in response to client requests 5%*390,000 =$19,500 19,500 Correcting own errors regarding building codes 7%*390,000 =$27,300 27,300 Total Professional-Labor costs 319,800 58,500 11,700 $390,000 Administrative and support costs at 44% ($171,600/$390,000) of professional-labor costs 140,712 25,740 5,148 171,600 Travel 15,000 15,000 Total 475,512 84,240 16,848 $576,600
2, What are the consequences of misclassifying a non-value- added cost as a value-added cost? When in doubt, would you classify a cost as a value-added or non-value-added cost? Explain briefly. Definition: Value-added cost would reduce the actual or perceived value or utility (usefulness) customers experience from using the product or service Non value-added cost would not reduce the actual or perceived value or utility (usefulness) customers gain from using the product or service
Value-added cost: Making calculations and preparing drawings for clients, Making changes in response to client requests If they misclassify these costs Professional staff would try to reduce these costs Non value-added cost: Correcting errors found in drawings, correcting own errors regarding building codes If they misclassify these costs these costs would reduce the value or utility (usefulness) customers experience from using the product or service
If they cannot judge value- added and non-value- added prefer to classify costs as non-value- added to focus organizational attention on cost reduction Grey area: checking calculation and drawings cut some costs that are value- adding, poor customer experiences
3, Suppose Calvert could eliminate all errors so that it did not need to spend any time making corrections and, as a result, could proportionately reduce professional- labor costs. Calculate Calvert s operating income for 2013.
1. Cost savings in professional labor costs: Eliminate all errors by Calvert associates: a) Correcting errors found in drawings (8%) b) Correcting own errors regarding building codes (7%) Work hours of professional staff: 7500 hours So total reduction in professional labor-hours is: 8% 7,500+7% 7,500 = 1,125 hours Salaries of professional staff per hour: $52 per hour So cost savings in professional labor costs is: 1,125 hours 52 = $ 58,500 2. Meanwhile, administrative and support costs vary with professional-labor costs, so the percentage of administrative and support costs on with professional-labor costs (based on 2013 I/S) is: $ 171600/$ 390000 = 0.44 So cost savings in variable administrative and support is: 0.44 $58,500 = $ 25740 Therefore total cost saving from eliminating errors is : $ 58,500 + $ 25,740 = $ 84240 3. Depending on database of income statement for 2013, we find that current operating income in 2013 Is $ 124650, so operating income in 2013 if errors eliminated is: $124,650 + $ 84,240 = $ 208890
Summary: Reduction in professional labor-hours by: Correcting errors found in drawings 600 Correcting own errors regarding building codes Total hours 1125 525 Cost savings in professional labor costs $ 58500 Cost savings in variable administrative and support costs 25740 Total cost savings 84240 Current operating income in 2013 124650 Operating income in 2013 after eliminating errors 208890
4. Now suppose Calvert could take on as much business as it could complete, but it could not add more professional staff. Assume Calvert could eliminate all errors so that it does not need to spend any time correcting errors. Assume Calvert could use the time saved to increase revenues proportionately. Assume travel costs will remain at $15,000. Calculate Calvert s operating income for 2013.
1. Assuming there is no errors the percentage of time =77%+3%+5%=85% 85% 7,500 hours = 6,375 hours (billed to clients generating revenues of $701,250) 2. The remaining 15% of professional labor-hours 15% 7,500 = 1,125 hours (is lost in making corrections) 3.Calvert bills clients at the rate of $701,250 6,375 = $110 per professional labor-hour. If the 1,125 professional labor-hours currently not being billed to clients were billed to clients, Calvert s revenues would increase by 1,125 hours $110 = $123,750 Calvert s revenues = $701,250 + $123,750= $825,000
Costs remain unchanged Professional labor costs Administrative and support (44% $390,000) Travel Total costs $390,000 171,600 15,000 $576,600 Calvert s operating income would be Revenues Total costs Operating income $825,000 576,600 $248,400
Summary: Summary: $248,400 $124,650= $123,750 $123,750/ $124,650=99.3% Operating income would increase 99.3%. In conclusion, Eliminating non value-added costs will increase the operating income if the resources saved could be used to generate revenues. For this reason, organizations should place great emphasis on reducing and eliminating non value-added costs.
13-18 1.calculate Snappy s operating income for 2013
Per unit (2)=(1)/250,000 Total for 250,000 titles(1) Revenue ($4*250,000) $1000,000 $4.00 Purchase cost of titles($3*250000) 750,000 3.00 Ordering costs($50*500) 25,000 0.1 Receiving and storage($30*4000) 120,000 0.48 Shipping ($40*1500) 60,000 0.24 Total cost 955,000 3.82 Operating income $45,000 $0.18
2. For 2014, retailers are demanding a 5% discount off the 2013 price. Snappy s suppliers are only willing to give a 4% discount. Snappy expects to sell the same quantity of marble tiles in 2014 as in 2013.If all other costs and cost-driver information remain the same, calculate Snappy s operating income for2014.
Price to retailers in 2014 is 95% of 2013 price =0.95*$4=$3.80 cost per tile in 2014 is 96% of 2013 cost =0.96*$3=$2.88.
Snappy s operating income in 2014 is as follows: Total for 250,000Tiles (1) $950,000 Per Unit (2)=(1)/250,000 $3.80 2.88 0.10 0.48 0.24 3.70 $0.10 Revenues($3.80*250,000) Purchase cost of tiles($2.88*250,000) 720,000 Ordering costs($50*500) Receiving and storage($30*4,000) Shipping($40*1,500) Total costs Operating income 25,000 120,000 60,000 925,000 $25,000
3. Suppose further that Snappy decides to make changes in its ordering and receiving-and-storing practices. By placing long-run orders with its key suppliers, Snappy expects to reduce the number of orders to 200 and the cost per order to $25 per order. By redesigning the layout of the warehouse and reconfiguring the crates in which the marble tiles are moved, Snappy expects to reduce the number of loads moved to 3,125 and the cost per load moved to $28. Will Snappy achieve its target operating income of $0.30 per tile in 2014? Show your calculations.
Per unit (2)=(1)/250,000 Total for 250,000 titles(1) Revenue ($3.8*250,000) 950,000 $3.80 Purchase cost of titles($2.88*250000) 720,000 2.88 Ordering costs($25*200) 5,000 0.02 Receiving and storage($28*3125) 87,500 0.35 Shipping ($40*1500) 60,000 0.24 Total cost 872,500 3.49 Operating income $77,500 $0.31
Although Revenue per tile has decreased by $0.20 ($4.00 $3.80) Purchase cost per tile has decreased by $0.12 ($3.00 $2.88) Snappy will be able to achieve its target operating income of $0.30 per tile, for the calculation of the new operating income is $0.31 per tile.
END Thank You~
