Question

E2-31B Classify costs along the value chain for a manufacturer (Learning Objectives 2 & 3) Suppose the cell phone manufacturer Nokia provides the following information for its costs last month (in millions): Delivery expense to customers via UPS $ 6 Salaries of salespeople................... $ 4 Chip set. $62 Exterior case for phone.................. $ 7 Assembly-line workers' wages .......... Technical customer-support hotline ............. Depreciation on plant and equipment............ Rearrange production process to accommodate new robot..... 1-800 (toll-free) line for customer orders...... $ 2 Salaries of scientists who developed new model $12 Requirements 1. Classify each of these costs according to its place in the value chain (R&D, Design, Production, Marketing, Distribution, or Customer Service). 2. Within the production category, break the costs down further into three sub- categories: Direct Materials, Direct Labor, and Manufacturing Overhead. 3. Compute the total costs for each value chain category. 4. How much are the total inventoriable product costs? 5. How much are the total prime costs? 6. How much are the total conversion costs?

Answer 1

1. Classification of the costs mentioned in the question in the value chain is as follows :

S. No.	Particulars	Amount ($)	Classification - Value chain category
1	Delivery expenses	6	Distribution
2	Salaries of salespeople	4	Marketing
3	Chip set	62	Production
4	Exterior case for phone	7	Design
5	Assembly-line workers' wages	8	Production
6	Technical customer support	9	Customer Service
7	Depreciation on plant & Equipment	75	Production
8	Rearrange production process	5	R&D
9	Toll-free line for customers	2	Customer Service
10	Salaries of scientists	12	R&D

2. Further break-down of production costs is as follows :

S. No.	Particulars	Amount ($)	Classification - Value chain category	Further break-down
3	Chip set	62	Production	Direct Material
5	Assembly-line workers' wages	8	Production	Direct Labour
7	Depreciation on plant & Equipment	75	Production	Manufacturing Overhead

3. Total costs for each value chain is as follows :

Value Chain Category	Amount ($)
Distribution	6
Marketing	4
Production	145
Design	7
Customer Service	11
R&D	17

4. In the case of a manufacturer, a product's inventoriable costs are the costs of the direct materials, direct labor and manufacturing overhead incurred in manufacturing the product.

Hence inventoriable costs for Nokia as a cell manufacturer = Direct Material + Direct Labour + Manufacturing Overheads = 62 + 8 + 75 = 145 $

5. Prime costs = Direct material + Direct labour = 62 + 8 = 70 $

6. Conversion costs = Direct labour + Manufacturing Overheads = 8 + 75 = 83 $