Dispute Regarding Fair Rate The following series of memos recently passed through the mail of the Worldwide
Question:
Dispute Regarding Fair Rate ‘The following series of memos recently passed through the mail of the Worldwide Enterprise Corporation. Exhibit 15-4 is an organization chart.
eee lio: Tom Tumbas, Manager Plans and Controls, Palo Alto Plant From: Clara Smith, Controller, Palo Alto Plant Re: Direct Personnel for Eagle Project One of the lab product managers for the Eagle Project would like to borrow some direct personnel from both the head assembly and the automated disk manufacturing functions. ’m not sure what we should charge the lab for them. Would you negotiate a meaningful rate with Mort Allen, their Con- troller? Cooperate, but don’t let him improve his cost picture at our expense.
10, ARSE Mort Allen, Controller, Palo Alto Lab From: Tom Tumbas, Manager Plans and Controls, Palo Alto Plant Our normal procedure in temporary transfers of direct personnel is to charge the borrowing department the hourly rate used for product costing purposes in the plant department of the borrowed personnel. For the head assembly personnel this would be salary plus a burden rate of $26/hour; for the automated disk personnel, salary plus a burden rate of $40/hour. I trust this will be satisfactory for you also.
Li lo: Tom Tumbas, Manager Plans and Controls, Palo Alto Plant From: Mort Allen, Controller, Palo Alto Lab How can your burden rates be so high? $26 or $40 is totally unrealistic; our burden rate is about $8. Why is it that, when we last negotiated a rate, your burden rate was $4/hour? Finally, if these people work on the Eagle project and it gets through development and turned over to manufacturing, you'll be getting back trained men and your learning costs for this new 
product will be reduced. Thus, you should consider giving us these people at salary.
IVAO: Mort Allen, Controller, Palo Alto Lab From: Tom Tumbas, Manager Plans and Controls Let me address a few of your points: no one here remembers where that old $4 burden rate came from, but we think it was “picked out of the air”
as a rate that would encourage you to use our people rather than hire outside at a time when we were operating substantially below full capacity. Furthermore, if we accept a meaningless, low rate today, a precedent will continue, requiring too low a rate for future transfers.
Any potential cost gains from learning in your area are highly speculative.
Those people may quit before we start building, and the project may never reach the manufacturing stage.
Our rates are higher than yours because our direct-labor personnel have a much larger support group. This support must be reflected in the cost of manufacturing the product, just as your support must be reflected in the R&D cost assigned to each product. Thus it still appears that our normal burden rate is the most meaningful for this transaction.
Wo, Io: Tom Tumbas, Manager Plans and Controls, Palo Alto Plant From: Mort Allen, Controller, Palo Alto Lab.
A meaningful rate would indeed be beneficial so we could make these decisions without a lot of time-consuming memo-writing. Because the people we take will be working for our managers, in our buildings, and receive primarily our support services, it would seem that a lower rate, reflecting only the costs of those services provided by you, would make the most sense.
What rate would that be? Our analysis indicates that you’d be supplying only personnel department services and some accounting services, and that a rate of about $1/hour should suffice.
Walla: Mort Allen, Controller, Palo Alto Lab From: Tom Tumbas, Manager, Plans and Controls Your logic is reasonable, but you suggest establishing a totally impractical precedent. We now control overhead expenses by each department within each function. We establish different burden rates for each manufacturing function so as to allocate costs to products. You appear to be suggesting that we establish different allocation rates for each department within a given function. If we did what your suggestion implies, I’d have every manufacturing department manager up here demanding a special rate for his men, since his department doesn’t get full service from some other department. This would be an impossible situation, especially when a temporary transfer takes place.
I could end up with hundreds of burden rates instead of the three I use now.
Why don’t we go with the normal rate? The difference will be a negligible part of your budget.
. How can the burden rate applied to direct-labor hours be so different in these similar organizations (i.e., $40, $26, $8)?
. Is the $40 or $26 rate a “fair” one to charge the lab?
. Can you suggest a solution that both men might find acceptable? lop2
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