Problem 1. Value-added, non-value-added costs. The Magill Repair Shop repairs and services machine tools. A summary of its costs (by activity) for 2013 is as follows:

a. Materials and labor for servicing machine tools      $1,100,000

b. Rework costs                                                    90,000

c. Expediting costs caused by work delays               65,000

d. Materials-handling costs                                     80,000

e. Materials-procurement and inspection costs          45,000

I. Preventive maintenance of equipment                    55,000

g. Breakdown maintenance of equipment                  75,000

1. Classify each cost as value-added, non-value-added, or in the gray area between.

2. For any cost classified in the gray area, assume 60% is value-added and 40% is non-value-added. How much of the total of all seven costs is value-added and how much is non-value-added?

3. Magill is considering the following changes: (a) introducing quality-improvement programs whose net effect will be to reduce rework and expediting costs by 40% and materials and labor costs for servic¬ing machine tools by 5%; (b) working with suppliers to reduce materials-procurement and inspection costs by 20% and materials-handling costs by 30%; and (c) increasing preventive-maintenance costs by 70°4 to reduce breakdown-maintenance costs by 50%. Calculate the effect of programs (a), (b), and (c) on value-added costs, non-value-added costs, and total costs. Comment briefly.

Problem 2. Target operating income, value-added costs, service company. Calvert Associates prepares architectural drawings to conform to local structural-safety codes. Its income statement for 2013 is as follows:

Cost Accounting: A Managerial Emphasis, Fifteenth Edition, by Charles T. Horngren, Srikant M. Dalai, and Madhav V. Rajan. Published by Prentice Hall.