Question

Please explain in atleast a page in your own words.

Assigning responsibility. Melrose Furniture Company is organized into two divisions, Assembling and Finishing. The Assembling Division combines raw materials into a semi-finished product. The product then goes to the Finishing Division for painting, polishing, and packing. During May, the Assembling Division had significantly higher raw materials costs than expected because poor-quality raw materials required extensive rework. As a result of the rework, Assembly transferred fewer units than expected to the Finishing Division. The Finishing Division incurred higher labor costs per unit of finished product because workers had substantial idle time. The president of the company is upset about these events.

a. Whom should the firm hold responsible for the raw materials variance in the Assembling Division? Explain.
b. Whom should the firm hold responsible for the labor (idle time) variance in the Finishing Division? Explain.

Answer 1

a) Melfrose Furniture Company has two divisions, Assembly and Finishing Division. Due to poor raw material quality and higher rework, Assembly Division could not supply desired quantity of semi finished products to Finishing Department which ultimately raised the cost of production of the finished product. We know cost of production is equal to cost of raw materials + labour cost + other costs(such as inventory costs, maintenance costs etc.). Supply of poor quality raw materials is mainly due to raw material suppliers. Therefore, firm should held both supplier and quality inspector of the firm for poor quality raw materials. Because it is primary duty of quality inspector to check the quality of supplied raw materials before allowing it to go into assembling division.

b) Due to low supply of semi finished products from Assembling department to Finishing department, average labor costs was high in Finishing department. This was simply due to less number of semi finished products available to labour force for painting, packaging and publishing. We know labour idle time is total time for which labour sits idle in an unit. Labour idle time is result of uncontrollable factors such as decline in market demand for the products, shortfall in the supply of raw materials to the unit etc. Let us explain the labour idle time by example. Suppose in a firm there are 10 labors making 200 finished items in 10 hours from raw materials. If due to any reason, there are less raw materials availability that can make just 160 finished items, then total hours required to make 160 items = 10/200 *160 = 8 hours. therefore labour idle time in this case will be 10-8 = 2 hours. Therefore, for labour idle time, a firm should not hold responsible to labour force but the furniture can hold both suppliers and Assembling division responsible for high labour idle time in Finishing division.