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ACCA Applied Knowledge · Management Accounting · Cost reductions and value enhancement

A product has a standard material cost of $40 per unit (5 kg at $8 per kg). A redesign reduces material use to 4 kg per unit, with the price unchanged at $8 per kg. The company produces 20,000 units a year. What is the annual cost reduction achieved, with the same quantity produced?

The annual cost reduction is $160,000. Material use falls by 1 kg per unit, saving $8 per unit at $8 per kg, and this is multiplied by 20,000 units. Old cost of $800,000 less new cost of $640,000 confirms the result.

  1. A$80,000
  2. B$160,000Correct
  3. C$200,000
  4. D$800,000

Explanation

Saving per unit = 1 kg × $8 = $8. Annual saving = $8 × 20,000 = $160,000. Check: old cost $800,000, new cost 4×8×20,000 = $640,000, difference $160,000. $80,000 wrongly uses 10,000 units, and $200,000 wrongly applies a 25% reduction to the $800,000 cost.

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