Labor costs of an auto repair mechanic are seldom based on actual hours worked. Instead, this labor cost is based on an industry average of time estimated to complete a repair job. This means a customer can pay, for example, $120 for two hours of work, on a car when the actual time worked was only one hour. Many experienced mechanics and complete repair jobs faster than the industry average. Assume that you are asked to complete such a survey for a repair center. The survey calls for objective input, and many questions require detailed cost data and analysis. The mechanics and owners know that you have the survey and encourage you to complete it in a way that increases the average billable hours for repair work.

Required:

Prepare the sections in a one-page memorandum to the mechanics and owners that describes the direct labor analysis you will undertake in completing this survey.

MEMORANDUM TEMPLATE

OBJECTIVE:

A statement about the need to be objective in the analysis. Both ethical and professional concerns should motivate the preparers desire for objectivity.

COST ACCOUNTING ESTIMATION:

The memorandum should outline how cost estimation is conducted. For example, you might describe how regression analysis was used to estimate the average time to complete the most common jobs. Explain why such an objective estimate is the time value that must be reported. Reporting a greater time value would be in violation of the code of professional ethics.

BUSINESS CONCERNS:

The memorandum should point out that the repair business should follow established business practices for setting cost estimates. There should also be an expressed concern of fairness for the customer in getting a fair value for the amount paid. Another concern will be a possible perception that the repair business typically overcharges the customer and something must be done about it. It is not fair to the customer to pay for time never received, and it is not fair to the mechanic to be paid on a jobs completed basis. Perhaps the compensation structure of the mechanic should be changed.

MECHANIC-RELATED ISSUES:

The memorandum should also be concerned about the quality of mechanical work. Is the work being done correctly and is customer safety in jeopardy by paying the mechanic on a job-by-job basis? Who is responsible for establishing a fair compensation system? These issues are likely topics for the memorandum.