Question
INDAH Company provides routine maintenance services for heavy moving and transportation vehicles. Although the vehicles vary, the maintenance services provided follow a fairly standard pattern.
INDAH Company provides routine maintenance services for heavy moving and transportation vehicles. Although the vehicles vary, the maintenance services provided follow a fairly standard pattern. Recently, a potential customer has approached the company, requesting a new maintenance service for a radically different type of vehicle. New servicing equipment and some new labour skills will be needed to provide the maintenance service. The customer is placing an initial order to service 150 vehicles and has indicated that if the service is satisfactory, several additional orders of the same size will be placed every three months over the next 3 to 5 years. The engineering department has provided the following relationship between units serviced and average direct labour hours used:
Unit Serviced | Cumulative Average Time per Unit (hours) |
40 | 2.500 |
80 | 2.000 |
160 | 1.600 |
320 | 1.280 |
640 | 1.024 |
As the workers learn more about servicing the new vehicles, they become more efficient, and the average time needed to service one-unit declines. Engineering estimates that all of the learning effects will be achieved by the time that 320 units are produced. No further improvement will be realized past this level.
Required:
a) Given the standard labour time at 0.768 hour per unit and the standard labour rate is RM15 per hour, calculate the Labour Efficiency Variance for servicing the first 320 units. (6 marks)
b) Explain your answer in a) and give possible reasons for the variance. (4 marks)
c) Assuming no further improvement in labour time per unit is possible past 320 units, explain why the cumulative average time per unit at 640 is lower than the time at 320 units. (4 marks)
d) Show how to get the standard hour time of 0.768 hours per unit. (6 marks)
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