PC Deco is a small company that makes an attractive and popular solid wood computer desk. Based on the recommendations of 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 look at last month 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 price variance, that's over $79'000 down the drain (,) in a single month! What's going on here?"

"We knew when we adoptedJIT that our materials cost 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 are making defect-free deliveries three times a day. In a few months we will be able to offset all of our higher purchasing 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 doesn't tell the whole story. We eliminated the inspection and maintenance positions and turned them all into direct labor workers. And with JIT flow lines and our new equipment, 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 should be able to produce a desk in just 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 desks just to keep everyone busy. Under the JIT approach, we start production only when we have an order."

"Well, you've got an order now!" roared Tom Hanson, "I've been looking at these reports for nearly 20 years, and I know inefficiency when I see it. Let's get things back under control!"

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, youhave gathered the following information:

a.The standard cost card for the desks is given below:

Standard Quantity or Hours

Standard Price

or Rate

Standard

Cost

Direct materials

15boardfeet( - )

$2 per boardfoot

$30.00

Direct labor

1.5 hours

10.00 per hour

15.00

Variable manufacturing overhead

1.5 hours

4.00 per hour

6.00

Total standard cost

$51

b.During June, the most recent month, the company purchased 290'000 board feet of material at a cost of $2.10 per board foot. All of this material was used in the production of 20'000 desks during the month.

c.The company maintains a stable workforce. Persons who previously were inspectors and on the maintenance crew have been reassigned as direct labor workers. During June, 35'000 hours were worked by direct labor workers. The average pay rate was $9.80 per hour.

d.Variable manufacturing overhead cost is applied on the basis of direct-labor hours. During June, the company incurred $118'000 in variable manufacturing overhead 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 hours in April, to 1.5 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 hours; May, 0.2 hours; and June, 0.1 hours.

Movement of goods:With the change of JIT flow lines, goods now move shorter distances 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.

Queue time:Better coordination of production with demand has resulted in less queue time as goods move along the production line. The average queue time per unit for the last three months has been: April, 14.9 hours; May, 10.6 hours; and June, 3.9 hours.

Required:

1.Compute 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 compute the materials price variance, what should be done to make this computation more appropriate?

2.Compute the direct labor rate and efficiency variances using traditional variance analysis. 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 not agree?

3.Compute the variable manufacturing overhead spending and efficiency variances using traditional variance analysis. Would you expect that the correlation still exists between direct labor and the incurrence of variable manufacturing overhead cost in the company? Explain, using the data from your variance computations to support your position.

4.Compute the following for the 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?