10-20

makes an attractive and popular solid wood computer desk. Based on the recommendations of the plant manager and the purchasing agent, the president of the company. Tom Hanson. had approved changing over to a JIT production and purchasing system. He was, however. very unhappy with the latest monthly standard cost variance report for the plant. Tom opened the first management meeting of the month with the following challenge: "1 thought JIT was supposed to make us more efficient, but just look at last month's efficiency report. The labor efficiency variance was $50,000 unfavorable. That's nearly five times higher than it's ever been before! If you add on the $29,000 unfavorable material prict variance, that's over 579,000 down the drain in a single month' What's going on here?' "We knew when we adopted JIT that our material costs would go up somewhat," replied Beth Chin, the company's purchasing agent. "Bat we've negotiated long-term contracts with our very best suppliers, and they re making defect-free deliveries three times a doy. In a few months we'll be able to offset all of our higher parchasing costs by completely vacating the warehouse we had been renting." "And I know our labor efficiency variance looks bad," responded Jose Martin, the plant manager, "but it doenn't tell the whole story. We elimioated the inspection and maintenanee positions and turned them all into direet labor workers. And with JIT flow lines and our new equipment, we've never been mote efficient in the plant." "How can you say youre efficient when you took 35,000 dirtet labor-hoers to produce just 20,000 desks last month?" asked Tom Hanson. "That worls out to be 1.75 hours per desk, bet accoeding to the standard cost card, you should be able to produce a desk in jost 1.5 hours. Do you call that efficient? "There are several reasons for that," answered lose, "but the biggest reason is that we don't want to make desks just to keep everyone besy. Under the JIT approach, we start production only whes we have an order." "Well, you've got an order now!' roared Tom Hianson, "I've been looking at these meports for nearly 20 years, and I know inefficiency when I see it. Let's get things back under controlt" After leaving Tom Hanson's office, Jose has approached you for help in explaining to the president why the efficiency report is at odds with the actual progress in the plant. Working with Jose, you have gathered the following information: a. The standard cost card for the desks is eiven belew: b. During June, the most tecent month, the company purchased 290,000 bound feet of material at a cost of $2.10 per board foot. All of this material was used in the prodection of 20,000 desks during the month. c. The company maintains a stable workforce. Persons who previously wete inspectors and on the maintenance crew have been reassigned as direct labor workers. Duriag June, 35,000 bouts were logged by direct labor workers. The average pay rate was $9.80 per bour. d. Variable manufacturing overhead cost is applied on the basis of direct labor-hours. Daring June, the company incurred $118,000 in variable manufacturing overbead costs. e. The following operating data has been gathered: Processing: As workers have become more familiar with the new equipment and procedures, average processing time per unit has declined over the last three months from 1.6 hoars in April, to 1.5 bours in May, to 1.3 hoars in June. Inspection: Workers are now directly responsible for quality control, which accoents for the following changes in inspection time per unit over the last three months: April. 0.3 bours: May, 0.2 hours; and June, 0.1 hours. Movement of goods: With the change to JIT flow lines, goods now move sberter distasces between work stations. Move time per unit over the past three inonths has been: April. 3.2 hours; May, 2.7 hours; and June, 1.2 hours. Quene time: Better coordination of production with demand has resulied in less cqueve time as goods move along the production line. The average queue time per anit for the last three months has been: April, 14.9 hours; May, 10.6 bours; and June, 3.9 boers. 1. Compute the materials price and quantity variances using traditional variance anulysis. Is the decrease in waste apparent in this compotation? Explain. If the compusy wants to compute the materials price variance, what should be done to make this computation more appropriate? 2. Compute the direct labor rate and efficiency variasces using traditional variasce analy* sis. Do you agree with Tom Hanson that the efficiency variance is still appropriate as a measure of performance for the company? Explain why you do or do ner agree. 3. Compute the variable manufacturing overhead spending and efficiency variances using traditional variance analysis. Would you expect that a correlation still exists between direct labor and the incurrence of variable manufacturing overhead cost in the company? Explain, using data from your variance computations to support your position. 4. Compute the following for April, May, and June: a. The throughput time per unit. b. The manufacturing cycle efficiency (MCE). 5. Which performance measure do you think is more appropriate in this situation-the labor efficiency variance or the throughput time per unit and manufacturing cycle efficiency? makes an attractive and popular solid wood computer desk. Based on the recommendations of the plant manager and the purchasing agent, the president of the company. Tom Hanson. had approved changing over to a JIT production and purchasing system. He was, however. very unhappy with the latest monthly standard cost variance report for the plant. Tom opened the first management meeting of the month with the following challenge: "I thought JIT was supposed to make us more efficient, but just look at last month's efficiency report. The labor efficiency variance was $50,000 unfavorable. That's nearly five times higher than it's ever been before! If you add on the 529,000 unfavorable material price variance, that's over $79,000 down the drain in a siagle month! What's going on here?" "We knew when we adopted JIT that our material costs would go up somewhat," replied Beth Chin, the company's purchasing agent. "But we've negotiated long-term contracts with our very best suppliers, and they're making defeet-free deliveries three times a day. In a few months we'Il be able to offset all of our higher purchasing costs by completely vacating the warehouse we had been renting." "And I know our labot efficiency variance looks bad," responded Jose Martin, the plant manager, "but it doesn't tell the whole story. We eliminated the inspection and maisteasase positions and tarned them all into direct labor workers. And with JIT flow lines and our new equipenent, we've never been more efficient in the plant." "How can you say you're efficient when you took 35,000 direct labor-hours to produce just 20,000 desks last month?" asked Tom Hanson. "That works out to be 1.75 hours per desk, but according to the standard cost card, you sbould be able to produce a desk in jast 1.5 hours. Do you call that efficient? "There are several reasons for that," answered Jose, "but the biggest reason is that we don't want to make devks just to keep everyone busy. Under the JIT approach, we start production only when we have an order." "Well, you've got an order nowt" roared Tom Hanson, "Ive been looking at these reports for nearly 20 years, and I know inefficieacy when I see in. Let's get things back usder control"" After leaving Tom Hanson's office, Jose has approached yoe for help in explaining to the president why the efficiency report is at odds with the actual progress in the plant. Working with Jose, yoe have gathered the following information: a. The standard cost card for the desks is eiven helow: b. During June, the most recent month, the company purchased 290,000 bound feet of material at a cost of $2,10 per board foot. All af this material was used in the production of 20,000 desks during the month. c. The company maintains a stable workforce. Persons whe previously were inspectors and on the maintenance crew have been reassigned as dircet labor workers. During June, 35,000 hours were logged by direct labor workers. The average pay rate was 59.SO per hout. d. Variable manufacturing overhead cost is applied on the basis of direct labor-hours. Deriag June, the company incurred $118.000 in variable manufacturing overhead costs. e. The following operating data has been gathered: Procersing: As workers have become mote familiar with the new equipment and procedures. average processing time per uait has declined over the last three months from 1.6 bours in April, to 15 hours in May, to 1.3 hours in June. Inspection: Workers are now directly responsible for quality control, which accounts for the following changes in inspection time per unit over the last three months: April, 0.3 bours: May, 0.2 houts; and Jane, 0.1 hours. Moviment of goods: With the change to JIT How lines, goods now move shorter distasces between work stations, Move time per unit over the past three months has been: April. 3.2 hours: May, 2.7 hours; and June, 1.2 hours. Quetue time: Better coordination of production with demasd has renulhed in less queae time as goods move along the production tine. The average queue time per wit for the last three months has been: April, 14.9 bours; May, 10.6 hours; aad June, 3.9 bours. 1. Compote the materials price and quantity variances using traditional variance analysis Is the decrease in waste apparent in this computation? Explain. If the company wants to compote the materials price variance, what should be done to make this compotation more appropriate? 2. Compute the direct labor rate and efficiency variances asing traditional variance analysis. Do you agree with Tom Hanson that the efficiency variance is still appropriate as a measure of performance for the company? Erplain why you do ot do nci agree. 3. Compute the variable manufacturing overhead spending and efficiency variances using traditional variance analysis. Would you expect that a correlation still exists between direct labor and the incurrence of variable manufacturing overhead cost in the company? Explain, using data from your variance computations to support your position. 4. Compute the following for April, May, and June: a. The throughput time per unit. b. The manufacturing cycle efficiency (MCE). 5. Which performance measure do you think is more appropriate in this situation-the labor efficiency variance or the throughput time per unit and manufacturing cycle efficiency