Question

XYZ Company has experienced increased production costs. The primary area of concern identified by management is direct labor. The company is considering adopting a standard cost system to help control labor and other costs. Useful historical data are not available because detailed production records have not been maintained.

To establish labor standards, XYZ Company has retained an engineering consulting firm. After a complete study of the work process, the consultants recommended a labor standard of one unit of production every 30 minutes, or 16 units per day for each worker. The consultants further advised that XYZ’s wage rates were below the prevailing rate of $15 per hour.

XYZ’s production vice-president thought that this labor standard was too tight, and from experience with the labor force, believed that a labor standard of 40 minutes per unit or 12 units per day for each worker would be more reasonable.

The president of XYZ Company believed the standard should be set at a high level to motivate the workers and to provide adequate information for control and reasonable cost comparison. After much discussion, management decided to use a dual standard. The labor standard of one unit every 30 minutes, recommended by the consulting firm, would be employed in the plant as a motivation device, while a cost standard of 40 minutes per unit would be used in reporting.

Management also concluded that the workers would not be informed of the cost standard used for reporting purposes. The production vice-president conducted several sessions prior to implementation in the plant, informing the workers of the new standard cost system and answering questions. The new standards introduced when wages were increased to the standard direct labor rate of $14 per hour.

The standard cost system was implemented on January 1, 2018. At the end of six months of operation, actual production and direct labor hours are:

January February March April May June
Production (units) 5,100 5,000 4,700 4,500 4,300 4,400 Direct labor hours 3,000 2,900 2,900 3,000 3,000 3,100 Quantity Variances: Variance based on labor standard (one unit each 30 minutes) Variance based on cost standard (one unit each 40 minutes)

	jan	feb	march	april	may	june
production units	5100	5000	4700	4500	4300	4400
direct laor hours	3000	2900	2900	3000	3000	3100
quantity variances:
one unit each 30 min
one unit each 40 min

*U = Unfavorable; F = Favorable

Actual direct labor rate approximated the standard rate, and materials quality, labor mix, and plant facilities and conditions have not changed to any great extent during the six month period.

Required:

1 Compute the Direct Labor Quantity variances for each month, under both the motivational and reporting standards.

2 Discuss the impact of different types of standards on employee motivation. Specifically, discuss your opinion of the likely effect on motivation of adopting the labor standard recommended for XYZ Company by the engineering firm.

3 Evaluate XYZ Company’s decision to employ dual standards in its standard cost system.

Answer 1

2)

Standards are often classified into three types - theoretical (tight), normal (reasonable), or Expected actual (loose). Standards which are too loose or too tight will generally have a negative impact on workers motivation. If too loose , workers will tend to set their goals at this low rate, thus reducing productivity below what is obtainable ; if too tight, workers will realize that it is impossible to attain the standard, become frustrated, and will not attempt to meet the standard. An attainable or reasonable standard which can be achieved under normal working conditions is likely to contribute to worker's motivation to achieve the designated level of activity.

If executive management imposes standards, workers and plant management will tend to react negatively because they feel threatened. If workers and plant management participate in setting the standard, they can more readily identify with it and it could become one of their personal goals.

In Given Case, it appears that the standard was imposed on workers be management. In addition, management used an ideal standard to measure performance. Both of these actions appear to have a negative impact on output over the first six months.

3)

XYZ Company made a poor decision to use dual standards. If the workers learn of dual standards, the company's entire measurement system may become suspect and credibility will be lost. Company's morale could suffer because the workers would not know for sure how the company evaluates their performance. As a result, disregard for the present and any future cost control systm may develop.