Operator 1: “I’ve been keeping an eye on my operating room instruments. I feel as though our energy consumption is becoming less efficient.”
Operator 2: “Every time the coating machine goes down, we produce waste on shutdown and subsequent startup. It seems like during the last half year we have had more unscheduled machine shutdowns than in the past. Thus, I feel as though our yields must be dropping.”
Operator 3: “My sense is that our coating costs are going up. It seems to me like we are spreading a thicker coating than we should. Perhaps the coating machine needs to be recalibrated.”
The Coating Department had no beginning or ending inventories for any month during the study period. The following data from the cost of production report are made available:
Paper stock
Coating
Conversion cost (incl. energy)
Pounds input to the process
Pounds transferred out
January February March April
$67,200
$11,520
$38,400
100,000
96,000
$63,840
$11,856
$36,480
95,000
91,200
$60,480
$12,960
$34,560
90,000
86,400
$64,512
$15,667
$36,864
96,000
92,160
May June
$57,120
$16,320
$32,640
85,000
81,600
$53,760
$18,432
$30,720
80,000
76,800
A
a. Prepare a table showing the paper cost per output pound, coating cost per output pound, conversion cost per output pound, and yield (pounds transferred out/pounds input) for each month.
b. Interpret your table results.
Answer:
The solution to this exercise is to determine if the cost per pound trends in paper stock, conversion, and coating costs are remaining stable over time. The following table can be developed from the data:
a.
January February March April May June
Paper stock
($ ÷ pounds output) $0.70 $0.70 $0.70 $0.70 $0.70 $0.70
Coating
($ ÷ pounds output) $0.12 $0.13 $0.15 $0.17 $0.20 $0.24
Conversion cost
($ ÷ pounds output) $0.40 $0.40 $0.40 $0.40 $0.40 $0.40
Yield (pounds
transferred out ÷
pounds input) 96% 96% 96% 96% 96% 96%
The cost per pound information is determined by dividing the costs by the
pounds transferred out. The yield is determined by dividing the pounds
transferred out by the pounds input.
b. Operator 1 believes that energy consumption is becoming less efficient. The energy cost is part of the conversion cost. The conversion cost per output pound has remained constant for the six months. If the energy efficiency were declining, it would take more energy per pound of output over time. Thus, we would expect to see the conversion rate per pound increasing if Operator 1 were correct.
Operator 2 believes that there are increasing materials losses from increasing startup and shutdown activity. Yield data would help determine if this were true. If materials losses were growing, then there would be less materials transferred out per pound of inputs over time. The yield has remained constant over the six-month period. Thus, Operator 2’s hypothesis is not validated. The stable cost of the paper stock per output pound also suggests that the yields are remaining stable.
Operator 3 is concerned about coating costs. The coating cost per output pound is increasing over time. Thus, we can conclude that the coating efficiency is declining over time. Apparently, twice the coating material was being spread per pound of output in June than in January. The coating operation may need to be repaired or recalibrated. Too much coating is being spread on the paper stock.