CHAPTER 10

DISCUSSION QUESTIONS

Q10-1 Yes, to the extent that it is practical to measure the value added or the productivity of a worker.
However, measurement of the contribution of each individual is never exact. Also, a business cannot
pay more for materials or labor than the sales price will recover. Materials, workers, and machines
produce products and services. There must be a difference between revenue and costs consumed;
otherwise, the business cannot survive.

Q10-2 Productivity may be defined as the measurement of production performance using the expenditure of
human effort as a yardstick. In a broader sense, it may be described as the efficiency with which
resources are converted into commodities and/or services that people want.

Q10-3 Productivity is important to a firm because high productivity reduces the unit cost of the output and
makes the firm more competitive. It is important to workers because their real earnings should be
increased when productivity is high. Productivity is important to society because increased productivity
enables society to get more and better output from the basic resources of the economy.

Q10-4 To measure labor efficiency, it is necessary to establish a standard of performance. This means
determining how much a worker should be able to produce, or how much a work crew should be able
to produce. The standard is determined by time and motion study, test runs by skilled workers, and
aver ages of past performance by skilled workers.

Q10-5 The purpose of an incentive wage plan is to induce a worker to produce more, resulting in a higher
wage and reduced conversion cost per unit. Frequently, machine output is limited by worker
performance. If employee performance can be increased, machine cost per unit of production will
decrease. An incentive wage plan may also reduce loafing, indifference, and carelessness, and may
generate a cost conscious labor force.

Q10-6 Generally, hourly earnings go up with increased production, and labor cost per unit of output is
reduced. High production rates also reduce overhead cost per unit of output, which is often the most
significant savings.

Q10-7 The basic concept underlying the relation ship involved in the cumulative average time learning curve
model is that every time the cumulative quantity of units produced is doubled, the cumulative average
time per unit is reduced by a given percentage.

Q10-8 The learning curve theory is used to solve problems such as determining labor costs in bids for
government contracts, determining lot costs for various stages of production runs, predicting labor-
hour requirements, permitting the calculations of standard labor cost variances, assisting in the
evaluation of a manager’s performance, and providing a basis for cost control.

Q10-9 The financial accounting aspect is concerned with a record of earnings of each employee and
payment of the workers. Financial accounting records income, FICA, and other payroll taxes and
deductions withheld; pro vides for disbursing funds to workers and to taxing and other agencies;
reports to each employee at least annually the amount of wages earned and the amounts withheld for
various purposes; and records the payroll liability and payment each payroll period.
The cost accounting aspect is concerned with time worked on each job or in each cost center, in
order to determine the labor hours and labor cost of production.

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Q10-10 An efficient labor force begins with the design of the product and an analysis of production techniques
and job requirements. With the personnel department adequately informed about job specifications, It
is the function of this department to secure the personnel qualified to do each job. The production
planning department keeps the work flowing smoothly. The timekeeping, payroll, and cost accounting
departments contribute to the total efficiency by accounting for the time purchased and by making
payment for the work as well as charging the cost to the proper department and product.

Q10-11 (a) The clock card shows the amount of time an employee spent in the plant each day of a payroll
period. It is evidence that the employee’s time has been purchased.
(b) The time ticket shows the amount of time an employee spends each day on each job or in each
department. It is an itemized invoice of the time that the employee sells to the employer.

Q10-12 Since the clock cards show the time employees are in the plant, the first step is to make sure no error
exists on the time tickets. If the total time shown on the time tickets is correct, then the workers spent
time in the plant when not working or not assigned to specific jobs or departments, or when assigned
to maintenance or repair work For the time that is idle or assigned to indirect labor, a charge is made
to Factory Overhead.

Q10-13 Bar codes are symbols that can be processed electronically to identify numbers, letters, or special
characters. Bar-coded employee identification cards or badges, and task identifications can be used
to replace clock cards and time tickets to collect payroll data and to measure worker activity.

Q10-14 Appendix One method would be to charge the premium costs directly to the products in the
same manner as straight-time labor costs. This would be appropriate when particular jobs have to be
rushed to completion. A second method would be to treat the premium as an overhead element to be
charged to all production through the allocation of overhead. It would be appropriate when the
overtime is a recurring condition normally incident to the level of operations

Q10-15 Appendix The recommended method in computing costs under a pension plan is to determine
actuarially the eventual pension payments to covered employees and to charge these future
payments as a cost of current production over the expected period of active service of covered
employees. Costs based on past services should be written off over some reasonable period on a
systematic and rational basis that does not distort the operating results of any one year. These costs
are incurred in contemplation of the present and future services not only of the individual employee,
but also of the organization as a whole. Benefits of the plan—such as improved morale, removal of
superannuated employ ees, and attraction of more desirable personnel—are expected to improve the
operating efficiency of a company.

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 EXERCISES

E10-1
Bridge Cumulative Average
Number × Required Weeks per Bridge
1 100
2 80 (100 weeks × 80%)
4 64 (80 weeks × 80%)
8 51.2 (64 weeks ×80%)

7 additional bridges must be built in order to bring the cumulative average below 52 weeks.

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website, in whole or in part.
E10-2
(1) The schedule below demonstrates the 80% learning curve that the company expects to experience in
producing the time devices:

Cumulative Cumulative
Lots × Average Cumulative
Time Time
1 90.00 hours = 90.00 hours
2 72.00 144.00
4 57.60 230.40
8 46.08 368.64

At an 80% learning factor, the cumulative time to produce 8 lots should be 368.64 hours. At a standard
labor rate of $9 per direct labor hour, the standard amount for total direct labor cost should be set at
$3,317.76 (368.64 × $9).
(2) The company should establish the standard for direct labor time equal to the marginal direct labor time
required to produce the eighth lot, providing steady-state production occurs after the eighth lot. To
assure that this standard time will be accurate, the company should:
(a) Keep accurate records through the first 8 lots to determine if an 80% learning factor is
experienced.
(b) Continue to keep accurate records for each successive production lot to provide a basis for:
1. Conformance to expectations about labor time (i.e., steady state production after 8 lots),
or
2. Determining when steady-state production does occur.

E10-3 APPENDIX
(1) Overtime premium charged to production worked on during the overtime hours:

Work in Process................................................................................................... 441

Payroll (40 hours × $9) + (6 hours × 1.5 × $9).......................................... 441

(2) Overtime premium charged to factory overhead:

Work in Process (46 hours × $9).................................................................. 414

Factory Overhead Control (6 hours × .5 × $9)............................................. 27
Payroll............................................................................................... 441

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 E10-4 APPENDIX
Subsidiary
Record
Dr. Cr.
Factory Overhead Control...................................................................... 201.60
Bonus Pay 134.401
......................................................................................... 67.202
Vacation Pay 134.40
......................................................................................... 67.20
Liability for Bonus
.....................................................................................................
1
Liability for Vacation Pay
($10 + $32) × 40 hours × 4 weeks = $6,720 ÷ 50 weeks = $134.40
2
($10 + $32) × 40 hours × 2 weeks = $3,360 ÷ 50 weeks = 67.20

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 PROBLEMS

P10-1

(1)
Cumulative Cumulative Time in Hours
Number of Number of Units (Lot Cumulative
Lots Size = 50) Average Time Per Unit Cumulative Time
1 50 4.0000
2 100 3.6000 (4.0000 × .9) 360.00 (3.6000 × 100)
4 200 3.2400 (3.6000 × .9) 648.00 (3.2400 × 200)
8 400 2.9160 (3.2400 × .9) 1,166.40 (2.9160 × 400)
16 800 2.6244 (2.9160 × .9) 2,099.52 (2.6244 × 800)

Direct labor hours required to produce the first 800 units.................................................... 2,099.52
Direct labor hours required to produce the first 200 units.................................................... 648.00
Direct labor hours required to produce the next order......................................................... 1,451.52
Number of units in the next order........................................................................................
600
2.4192
Direct labor hours per unit for the next order (1,451.52 ÷ 600)...........................................

Catonic Part Number PCB-31

Unit Costs and Prices for Rex Engineering Company
Estimates
Incorporating
a 90% Learning
Curve

Materials........................................................................ $180.00
Labor and employee benefits (2.419 × $20).............. 48.38
Variable overhead (50% of labor).............................. 24.19
Total variable cost ....................................................... $252.57
Fixed overhead ............................................................ 40.00
Full cost......................................................................... $292.57
Profit contribution (10% of full cost) ......................... 29.26
Estimated contract price.............................................. $321.83

(2) The implications of an 80% learning curve as opposed to a 90% learning curve are:
(a) An 80% learning curve indicates a greater effect of experience on efficiency.
(b) Most of the increase in efficiency (decrease in time and cost per unit) due to an 80% learning
curve occurs early in the production run; thus, saturation in learning is achieved earlier with an
80% learning curve.

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P10-1 (Concluded)
(3) The degree of learning that takes place in an industrial operation would be reduced by:
(a) a low proportion of assembly labor to machine labor;
(b) an operation of low complexity;
(c) high employee turnover;
(d) tedium;
(e poor working conditions.

P10-2 APPENDIX
(1) Charge to work-in-process:
Normal working hours = 40 hours × 2 = 80 hours
Let X = overtime hours

$1.140 - (80*$12)
X=
($12*1.5)

X = 10 hours

Therefore, charge to work in process = 90 × $12 = $1,080

(2) Factory overhead charge for Employee #1071: $273.20

Company benefits paid by employer................................... 60.00 ($1,140 – $1,080)
Overtime premium............................................................... $333.20

(3) The cost of idleness should be charged to the departmental factory overhead account.

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 CASES

C10-1
(1) Arguments used by each proponent:
(a) 1,000-pieces-per-hour-rate:
(1) Studies show that machines can be operated at this rate.
(2) Variances determined by this output rate will measure the ineffective use of the machines.
(3) This rate can be a target level to be strived for, and the changing variances will show
progress toward this target.
(4) A goal of this nature will motivate the supervisor, and thereby the work ers, to reach this rate
of output.

(b) 750-pieces-per-hour-rate:
(1) This rate of output has been attained by some workers.
(1) The 1,000-pieces-per-hour rate has not been attained, nor has any rate near to it been
attained.
(2) The 600-pieces-per-hour rate is an average of actual performance and does not represent
good economical performance.
(3) The standard cost should reflect production rates that can be attained when good
economical performance occurs. The 750-pieces-per-hour rate, capable of being achieved
by some workers, would seem to be such a performance.
(4) The variances would measure the extent by which this economical level has been exceeded
or the extent to which it has not been met.
(5) It should provide motivation for the supervisor to improve on the 600-pieces-per-hour
current rate and in turn motivate the employees to improve their performance.

(c) 600-pieces-per-hour rate:

(1) This rate has been achieved by the department as a whole. The standard costs should be
set to reflect the ability of the whole department.
(2) The variances from standard cost based upon the 600-pieces-per-hour rate would measure
the departures, favorable and unfavorable, from the current effective level of operations.
(3) For two thirds of the workers, the 750-pieces-per-hour rate would be difficult to attain and
would tend to frustrate them, thus making even the present 600-pieces-per-hour rate difficult
to maintain. For all workers, the 1,000-pieces-per-hour rate could not be attained, thus
lowering the morale of the department and probably lowering output below current levels.
(4) The 600-pieces-per-hour-rate, when passed down to the production worker, would be an
appropriate goal for those three employees who are producing fewer than 600 pieces per
hour.

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C10-1 (Concluded)
(2) The purpose of standard costs and standard cost reporting is to measure the performance of a
department against a level of cost incurrence that represents attainable good economical
performance. The variances indicate the periods when the performance varied (favorably or
unfavorably) from this acceptable level.
To be used effectively, the rate to motivate the supervisor and, thereby, the workers to improve
performance would depend upon the perceptions as to what is attainable. It would also depend upon
the reward structures within the firm. Other variables would also affect what output rate would
motivate improved performances.
The value picked (e.g., 1,000, 750, or 600) must be a compromise between the level that will
have the most effective motivational result and that which will be an effective representation of the
costs when the department is operating at an acceptable economical level. The 1,000-pieces-per-
hour rate should be rejected because it does not provide the basis for a measure of an acceptable
cost level. It would also be of questionable value from a motivational point of view, because it appears
to be unattainable by the production workers.
The 750-pieces-per-hour rate is a possible choice. It is capable of being achieved by some
workers and as such may provide motivation to the supervisor to bring other workers up to that level,
thus achieving a departmental out put of 750 pieces per hour. It also may represent the appropriate
basis for a standard cost because it is a possible acceptable level of performance. It may also be a
suitable departmental target established in connection with the introduction of the standard cost
system.
The 600-pieces-per-hour rate is also a possible candidate. The Punch Press Department has
achieved this level, and three of the six employees have been able to achieve it. It is, however, the
current level of output and that may make it ineffective in motivating the department and its workers
to improve the level of output. As the basis for standard costs, it could represent an acceptable level
of output; but it does not incorporate the possible improvement likely to be obtained in connection
with an introduction of a cost system.
The 750-pieces-per-hour rate seems to be the best choice of the three alternatives. More
information about the conditions under which the engineering studies were done, the training and
experience of the workers, and the trend of worker and department output in recent periods would be
necessary, before the number could be chosen with some assurance that it would meet the stated
objectives.

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website, in whole or in part.
C10-2
(1) An advantage of the new payroll incentive plan is that it recognizes a problem, which should improve
employee motivation. Action taken by management will be perceived as a positive effort to resolve a
problem, and employees may feel more a part of the group and behave as team members.
Some disadvantages, which could lower employee motivation, are that employees’ files are
open to scrutiny by peers, and that employees may feel that they have to be a part of the “in group” to
be assured recognition for wage increases. The plan could degenerate into a popularity contest.

(2) Some advantages that should improve employee productivity are the incentives the plan provides for
employees to perform efficiently and effectively, and the beneficial competition it promotes among
employees, as long as it is in harmony with corporate goals.
A disadvantage that could lower employee productivity is that the plan could lead to collusion
among groups of employees to keep productivity levels artificially low. Employees could approve
each other’s wage requests without appropriate merit. The plan also could result in inefficiencies,
because employees who have had their wage increases turned down may not work up to capacity
due to a loss of interest.

(3) Some advantages that should improve goal congruence between the employee and the company are
that the plan indicates the company’s interest in the needs of the employees, and that the plan may
result in increased profit through improved productivity, which may lead to employees earning a larger
income through increases in wages.
Some disadvantages that could lower goal congruence are that employees may mistrust a
wage plan suggested and implemented by management, and that there may be an overemphasis on
a limited range of performance measures.

(4) Some advantages that should improve administration of the plan are that procedures for requesting a
wage increase and for its approval are clear and unambiguous, and the plan allows for relatively
quick positive feedback and peer recognition.
Some disadvantages that could hamper plan administration are that there is a limited amount
of management input and control, and that there will be additional record-keeping responsibilities
associated with the voting procedures and maintenance of employee productivity records and
personnel files.

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website, in whole or in part.
C10-3
(1) The basic premise of the learning curve is increased productivity as experience is gained in the
performance of repetitive tasks. Various inputs to the production process may be used more efficiently
as cumulative output increases, but in most production processes the majority of cost savings
associated with a learning phenomenon involve the use of human labor.

(3200 + 2240)÷16 340

(2) = = 85 % learning rate
3200÷8 400
(3) With a learning rate up to cumulative output of 32 units, average direct labor hours used to produce
these 32 units should equal 85% of the average direct labor hours used to produce the first 16 units. In
short, average hours employed for each unit when 32 units are completed should equal:

340 × .85 = 289 hours per unit.

This implies a total of 289 × 32 = 9,248 hours used in the production of the first 32 units, or

9,248 – 3,200 – 2,240 = 3,808 hours

used in the production of units 17 through 32. If the average hours per unit in this production batch is
taken as the direct labor standard, the standard per unit becomes:

3808
= 238 hours per unit 16 units
16
(4) Bid price on order of 96 units:
Raw materials (50 sq. ft. × $30)................................................ $ 1,500
Direct labor (238 hours × $25).................................................. 5,950
Variable factory overhead (238 hours × $40).... 9,520
Total variable manufacturing cost per unit................................ $ 16,970
Markup ($16,970 × 30%).......................................................... 5,091
Bid price per unit....................................................................... $ 22,061
Number of units........................................................................ × 96
Total bid price........................................................................... $2,117,856

(5) Some applications of the learning curve in the planning and controlling of business operations are
setting performance standards, preparing cost estimates in competitive bidding, determining budget
allowances for labor and labor-related costs, scheduling labor requirements, and determining
performance evaluations in which periodic progress reports are compared with accomplishments
expected under the curve.

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website, in whole or in part.
C10-4
Shortcomings:
(1) Actual payroll hours are not approved by production management.
(2) There is inadequate segregation of duties within the Payroll Department.
(3) Personnel Department should not have access to payroll checks.
(4) Department supervisors should not distribute the payroll checks.

Suggested corrective action:

(1) All incoming time cards should be signed by both the employee and supervisor.
(2) The payroll clerk preparing the input for data processing should not do the reconciling, but rather a
second clerk should reconcile the payroll journal to the time cards.
(3) An employee of supervisory level should authorize voiding of computer-generated checks and the
subsequent preparation of a manual replacement check.
(4) Replacement checks should be processed following good internal control procedures.
(5) All payroll checks, including unsigned replacement checks, should then be given to the Accounting
Department rather than to the Personnel Department for storage in a secure location until payday. No
Accounting Department employee with payroll record-keeping responsibility should have access to
the undistributed checks.
(6) On payday, checks should be distributed, preferably by a Treasurer’s Department employee or by an
Accounting Department employee who does not have record-keeping responsibilities.

SUPPLEMENTARY QUESTIONS AND EXERCISES

1.

(1) 80% learning curve:

Cumulated
Average hours per batch Cumulated total hours
batch
1 90 90
2 72 (90  80%) 144 (72  2)
4 57.60 (72  80%) 230.40 (57.60  4)
8 46.08 (57.60  80%) 368.64 (46.08  8)
The total direct labor cost required for the production of the first 8 lots:
= 368.64  $6 = $2,211.84

(2) In order to ensure the correctness of standard labor hours, Sagar Company should be:
a. Maintain proper records of the first 8 lots, to determine whether it should indeed serve 80% of
learning curve.
b. The continued production of each batch of products to maintain proper records for purpose in
accordance with the following:
(a) Labor hours are consist with expectations.
(b) To sure that stable production conditions have occurred.

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2.

(1) The company’s learning curve ratio is:

(3,200 + 2,240) / 16 340
= = = 85%
3,200 / 8 400
Hence, after the 3rd batch, the average labor hours per unit is:
= 340  85% = 289 hours per unit
Therefore, the total labor hours for first 32 units is 9,248 hours (289  32). Namely, the 17 to 32 units
will consume 3,808 hours (9,248 - 3,200 - 2,240). Therefore, the standard labor hours per unit for 17
to 32 units as:
3,808
= = 238 hours per unit
16 units
That is, the cumulative average labor cost per batch after the 3rd batch is:
= 238 (hours per unit)  8 (units)  $25 (direct labor rate)
= $47,600

(2) After the first 32 units were manufactured, a bid on a 40 units were calculated as:
Quantity per Unit cost per Production cost
Input
unit input per unit
Direct Materials 50 g. $30 $1,500
Direct Labor 238 hrs 25 5,950
Variable Overhead 238 hrs 40 9,520
Total Variable Cost $16,970
Markup (30%) 5,091
Bid price per unit $22,061
 40 units  40
Total bid $882,440

(3) Management in the application of the learning curve, it should be noted its limitations and pitfalls:
a. Degree of learning among different industries. Thus, based on the actual rate of the learning
experience is better than random selection.
b. According to the plan set by the learnings curve should be regarded as an approximation of the
actual time.
c. Since the time is based on the estimated value of the first batch, and therefore should pay
particular attention to the accuracy of this time.
d. Remembering equivalent.
e. Labor resistance.
f. High early demand.
g. Change purchasing practices.
h. Design changes.
i. Change in indirect labor.

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