Value-Stream Product Costing, ABC, andDBC

Brasher Company is transitioning to alean manufacturing system and has just finalized two orderfulfillment value streams. One of the value streams has twoproducts, and the other has four products. The two-product valuestream produces precision machine parts and the four-product valuestream produces machine tools. Before moving to the value-streamstructure, Brasher had a well-developed ABC system (one that usedall duration drivers) and had experienced good success with themore accurate product costs. Management wanted to be sure that theaverage costing approach of value-stream costing did not producedistorted product costs. Accordingly, expected weekly activity datawere provided for the two-product value streams to see how wellaverage costing worked (see below); however, management did notwant to continue using ABC because of its intense data demands andthe cost of updating as changes unfolded due to lean practices. Inthe table below, the driver for each activity is a duration driver.Order processing, for example, uses hours available for processingorders; purchasing uses hours available for processing purchases,etc.

Machine Parts ValueStream

For the ComingWeek

                                  Conversion      PartM15        PartM78    Total Activity

Activity                         Cost         (hoursused)   (hoursused)        hours

Orderprocessing          $36,000          600                 1,800              2,400

Purchasing                    72,000          200                   300                  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

Shipping                         18,000          600                   200                 800

Invoicing                        32,000           700                     800               1,500

Totals                         $670,000           6,100                 7,300           13,400

During the week, the machine partsvalue stream expects to produce and ship 10,000 units of M15 and30,000 units of M78. Since materials cost is calculated separately,the main concern is with the unit conversion cost.

Required:

1. Calculate the average unit conversion cost for the twomachine parts.

2. Calculate the conversion cost perunit for each part, using ABC. Comparing ABC unit cost with theaverage cost, what would you recommend?

3. Calculate the conversion cost per unit, using DBC (firstcalculating the cycle time for each product). Based on thisoutcome, what would you recommend to the management of BrasherCompany?