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Case Study Labor standards, Accounting Basics

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Labor standards
Geeta & 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, Geeta & 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 Geeta''s wage rates were below the prevailing rate of Rs per hour.
`Geeta''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. he president of Geeta & 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 were not related to incentive pay but were introduced when wages were increased to Rs7 per hour.
The standard cost system was implemented on January 1, 19--. At the end of six months of operation, these statistics on labor performance were presented to executive management:




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)

Rs3150 U*

Rs2,800 U

Rs3,850 U

Rs5,250 U

Rs5,950 U

Rs6,300 U
Variance based on cost standard
(one unit each 40 minutes)

Rs2,800 F

Rs3,033 F

Rs1,633 F

-0-

Rs933 U

Rs1,167 U















*U = Unfavorable; F = Favorable
Materials quality, labor mix, and plant facilities and conditions have not changed to a significant extent during the six month period.

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