Please read:

CASE 11-1

Jackson Sound produces amplifiers and mixing boards

in a modern production facility. The company is well known

for its quality products. Each item is thoroughly tested before it

leaves the plant. Workers are highly skilled. The company considers

direct labor to be a fixed cost because it does not reduce

the workforce when there is a small downturn in business, and it

can accommodate production increases of up to 10 percent due

to excess capacity.

In the production process, workers in the circuit department

prepare circuit boards that are sent to the case department for

installation in custom cases. In the past 6 months, the workers

in the circuit department have pursued a number of process

improvement initiatives that have resulted in much shorter

production times. For example, the Model LE7 amplifier used

to require 12.5 standard labor hours in the circuit department,

but the standard was revised last month to only 10.4 standard

hours.

Although the circuit department has made production improvements,

the chief financial officer of the company, Christopher

Carlson, is concerned about a major buildup of in-process

inventory that is occurring between the circuit department and

the case department. "What's going on?" he asked his assistant,

Megan Welles. "I was walking through the plant yesterday and I

saw a tremendous amount of in-process inventory. I thought we

had implemented a JIT system and we were working to balance

our production processes. That investment in work in process is

just going to drag down company performance."

Megan replied that the source of the problem might be related

to the process improvements and the fact that bonuses for production

workers are tied to standard cost performance. Christopher,

however, didn't see how a process improvement could actually

make things worse.

Required:

Assume that the company is reluctant to fire workers in the circuit

department even if they are not really needed. (After all, they have

just worked hard to improve productivity.) Given the production

improvements and the institution of new standards, explain why

the circuit department has an incentive to overproduce (i.e., produce

more output than can be handled by the case department).

(Hint: If the circuit department does not overproduce, what will

be the effect of the process improvements on the labor efficiency

variance?)