THAYER MANUFACTURING COMPANY MSIT 456, Case #4 Fall 2021 Early in January 2021, Mr. Peter Thayer, president of the Thayer Manufacturing Company, received the cost report shown in Exhibit 1. This report was for the frame department which was one of the primary producing departments in the company. Mr. Thayer was alarmed by the report because of the unexpected increase in costs. He commented that the only area of efficiency seemed to be in the use of indirect labor. Mr. Thayer requested an investigation of the situation, which produced the following information: The metal frame department made two types of frames which were used in the construction industry. The primary difference between the types of frames was their size. The larger size of frame, called the J-frame, required more material than the smaller frame (the 'S-frame"), but less direct labor time was required for the J-frames because of an automatic assembly process which had not yet been adapted to the small frames. The department supervisor said that the J-frame required about two units of raw material (primarily metal stripping), whereas the S-frame required only one unit. The supervisor indicated that these quantities were based on normal operating efficiency. An investigation of storeroom records showed that 560,000 units of raw materials had been issued during 2020, whereas only 535,000 units had been issued in 2019 The direct labor requirement was the opposite of the raw material requirement. A J-frame required about one-half the amount of labor time as did the S-frame. The foreman estimated that, under normal working conditions, the department should produce about ten J-frames per labor hour. The direct labor in the department was about the same insofar as the level of skill required, and the average wage rate per hour was $12.50. Failure to schedule work properly and failure to provide adequately for absenteeism (primarily the responsibility of the personnel department) sometimes resulted in a night shift which was paid a 10% premium. The company's policy was to avoid night shift work if at all possible Late in 2019, the raw material supplier announced that its prices would go up by 10% on January 1, 2020, from $1.00 to $1.10 per unit. The direct labor rate for 2020 continued at approximately, $12.50 per hour. An investigation of the payroll showed that about 52.000 direct labor hours were actually paid for during 2020, while about 50,500 hours had been paid in 2019. The actual direct labor rate did vary from the $12.50 rate because of some night shift work and also because in February 2020 some workers were transferred into the frame department to cover excess absenteeism due to a mild influenza epidemic. These transferred workers received a wage rate somewhat higher than the average for the frame department An investigation of the general burden overhead) revealed that this cost was an allocated cost. The company's practice was to assign the general administration burden (the cost of such departments as accounting personnel, general factory administration, engineering, etc) to producing departments on the basis of total direct and indirect labor dollars (excluding supervision). The total general burden for the company was $580,000 in 2019 and $575,000 in 2020 The total direct and indirect labor cost for all producing departments was $900,000 in 2019 and 5630,000 in 2020 During 2020, the company purchased and installed, at a total cost of $340,000, some portable conveyers which made it possible to release several material handlers who made up the largest element of indirect labor. The desirability of the equipment had been assessed by using a ten-year economic life, and this period was chosen for depreciation purposes. A full year's depreciation had been included for 2020 The power cost was assigned to the frame department by using the unit cost of power as determined by the power service department In 2019. this cost was eight cents ($.08 per kilowatt-hour), whereas the rate went up to nine cents ($.09 per kilowatt-hour) in 2020 because of an increase in the cost of fuel used to generate the power. The foremen of the power department and the frame department agreed that power consumption was highly dependent on direct labor hours. The frame department foreman said that a fairly good rule of thumb that had been used in Page 1 THAYER MANUFACTURING COMPANY MSIT 456, Case #4 Fall 2021 the past was 10 kilowatt-hours of power for every hour of direct labor. He said that if power were used efficiently that this rate should be attainable. A check of the production reports showed that production of completed frames for each of the two years was as follows: 2019 2020 S-frames 150,000 150,000 J-frames 180,000 200,000 Required: 1. Explain, insofar as possible, the significance of and reasons for the increase in costs. Use as many cost variances as you can identify 2. In general, how would you rate the efficiency or the metal frame department in 2020? 3. Can you suggest a better way of reporting costs for the department in the future? Page 2 THAYER MANUFACTURING COMPANY MSIT 456, Case #4 Fall 2021 EXHIBIT 1 Comparison of Manufacturing Costs Motal Frame Department 2019 2020 Variance 2020 over 2019 $ 535,000 650,000 $ 616 000 675,000 $ 81,000 25,000 Raw materials Direct labor Department overhead Indirect labor Supervision Power Depreciation General burden Total 50 000 10.000 41,000 15,000 116.000 $1417000 10.000 10 000 47,500 50.000 113? 250 $1540.750 (40.000 0 6 500 35.000 16250 51227 Page 3 THAYER MANUFACTURING COMPANY MSIT 456, Case #4 Fall 2021 Early in January 2021, Mr. Peter Thayer, president of the Thayer Manufacturing Company, received the cost report shown in Exhibit 1. This report was for the frame department which was one of the primary producing departments in the company. Mr. Thayer was alarmed by the report because of the unexpected increase in costs. He commented that the only area of efficiency seemed to be in the use of indirect labor. Mr. Thayer requested an investigation of the situation, which produced the following information: The metal frame department made two types of frames which were used in the construction industry. The primary difference between the types of frames was their size. The larger size of frame, called the J-frame, required more material than the smaller frame (the 'S-frame"), but less direct labor time was required for the J-frames because of an automatic assembly process which had not yet been adapted to the small frames. The department supervisor said that the J-frame required about two units of raw material (primarily metal stripping), whereas the S-frame required only one unit. The supervisor indicated that these quantities were based on normal operating efficiency. An investigation of storeroom records showed that 560,000 units of raw materials had been issued during 2020, whereas only 535,000 units had been issued in 2019 The direct labor requirement was the opposite of the raw material requirement. A J-frame required about one-half the amount of labor time as did the S-frame. The foreman estimated that, under normal working conditions, the department should produce about ten J-frames per labor hour. The direct labor in the department was about the same insofar as the level of skill required, and the average wage rate per hour was $12.50. Failure to schedule work properly and failure to provide adequately for absenteeism (primarily the responsibility of the personnel department) sometimes resulted in a night shift which was paid a 10% premium. The company's policy was to avoid night shift work if at all possible Late in 2019, the raw material supplier announced that its prices would go up by 10% on January 1, 2020, from $1.00 to $1.10 per unit. The direct labor rate for 2020 continued at approximately, $12.50 per hour. An investigation of the payroll showed that about 52.000 direct labor hours were actually paid for during 2020, while about 50,500 hours had been paid in 2019. The actual direct labor rate did vary from the $12.50 rate because of some night shift work and also because in February 2020 some workers were transferred into the frame department to cover excess absenteeism due to a mild influenza epidemic. These transferred workers received a wage rate somewhat higher than the average for the frame department An investigation of the general burden overhead) revealed that this cost was an allocated cost. The company's practice was to assign the general administration burden (the cost of such departments as accounting personnel, general factory administration, engineering, etc) to producing departments on the basis of total direct and indirect labor dollars (excluding supervision). The total general burden for the company was $580,000 in 2019 and $575,000 in 2020 The total direct and indirect labor cost for all producing departments was $900,000 in 2019 and 5630,000 in 2020 During 2020, the company purchased and installed, at a total cost of $340,000, some portable conveyers which made it possible to release several material handlers who made up the largest element of indirect labor. The desirability of the equipment had been assessed by using a ten-year economic life, and this period was chosen for depreciation purposes. A full year's depreciation had been included for 2020 The power cost was assigned to the frame department by using the unit cost of power as determined by the power service department In 2019. this cost was eight cents ($.08 per kilowatt-hour), whereas the rate went up to nine cents ($.09 per kilowatt-hour) in 2020 because of an increase in the cost of fuel used to generate the power. The foremen of the power department and the frame department agreed that power consumption was highly dependent on direct labor hours. The frame department foreman said that a fairly good rule of thumb that had been used in Page 1 THAYER MANUFACTURING COMPANY MSIT 456, Case #4 Fall 2021 the past was 10 kilowatt-hours of power for every hour of direct labor. He said that if power were used efficiently that this rate should be attainable. A check of the production reports showed that production of completed frames for each of the two years was as follows: 2019 2020 S-frames 150,000 150,000 J-frames 180,000 200,000 Required: 1. Explain, insofar as possible, the significance of and reasons for the increase in costs. Use as many cost variances as you can identify 2. In general, how would you rate the efficiency or the metal frame department in 2020? 3. Can you suggest a better way of reporting costs for the department in the future? Page 2 THAYER MANUFACTURING COMPANY MSIT 456, Case #4 Fall 2021 EXHIBIT 1 Comparison of Manufacturing Costs Motal Frame Department 2019 2020 Variance 2020 over 2019 $ 535,000 650,000 $ 616 000 675,000 $ 81,000 25,000 Raw materials Direct labor Department overhead Indirect labor Supervision Power Depreciation General burden Total 50 000 10.000 41,000 15,000 116.000 $1417000 10.000 10 000 47,500 50.000 113? 250 $1540.750 (40.000 0 6 500 35.000 16250 51227 Page 3