Heath Metal Products Chris Maynard, one of Heath Metal Products’s three customer engineers, is reviewing the costs of the radar housings for Lingle Aerospace (LA). LA is one of Maynard’s largest accounts and the radar housing is a fabricated piece of sheet metal LA uses to assemble an aircraft’s radar system installed in the nose of the plane. In reviewing the detailed cost record for this job, Maynard is concerned that the direct labor posted to the job appears too high. He estimated the direct labor in the welding department to be six hours per batch of 130 units. But the job sheet reports that 9.5 hours were used.
Background: Heath Metal Products is a custom machine shop that bids on orders and produces sheet metal parts in batches. It was founded 30 years ago by two tool and die makers in their mid-30s: Jack Spence and Don Carter. Spence and Carter were previously employed by a national automobile company. They started Heath to make parts for local large manufacturing firms that did not have sufficient capacity to meet short-run production schedules. Now Heath competes by supplying certain types of parts more cheaply than large companies can produce them internally. It does this by (1) bidding on jobs with run lengths that match Heath’s machine configurations, (2) employing nonunion labor, and (3) avoiding much of the overhead existing in big factories. Heath Metal Products now manufactures sheet metal parts used in a variety of office products, computers, and printers. The firm has grown in recent years and has benefited from the outsourcing movement whereby large firms seeking to reduce their manufacturing costs outsource noncritical metal fabricated parts. Heath’s single plant has a number of sheet metal presses (the largest being a 500-ton press), numerically controlled cutting and drilling machines, lathes, drill presses, and electric arc welders. Engineers contact customers to see if they have parts they are willing to outsource. Usually, the customer is introducing a new model and has not produced the tools necessary to fabricate the part internally. Heath’s customer engineer works with the client on the manufacturing and design specifications for the part and submits a bid to produce and deliver a set number of parts over a given time period at a fixed price. In the process of preparing the bid, the customer engineer forecasts the cost of the job by estimating direct labor, direct material, and machine time required in each factory department. Due to intense competition from other firms (as large office equipment companies constantly shift production worldwide to find the lowest-cost, highest-quality producers), shops such as Heath have high variability in volumes. In response to these volume changes, Heath is always laying off and rehiring employees. If Heath loses a large contract, it often requires six to nine months to replace the work. In the meantime, employees are laid off until new work can be found. Two hundred employees now work at Heath, including sales, administrative, and factory employees. Besides production workers, Heath has a maintenance and janitorial staff. To improve cost competitiveness, Spence and Carter have been trying to get production employees to take over more of the maintenance and clean-up tasks when they have idle time. They would also like to see the workers cross-trained in more production and maintenance tasks to help better balance work flow in the factory. These actions will raise productivity and reduce costs. However, the attempts at cross training have achieved very limited success.
Compensation system Heath does not have a formal pay-for-performance or bonus system. All employees are paid straight salary with annual raises. Customer engineers do not receive commissions for sales. In good years, raises are higher. Management has explored incentive pay and piece-rate systems. They have concluded that the constantly changing product mix would cause such systems to be very expensive to implement and maintain. At a sales staff meeting in February, Phil Matson, Heath’s vice president of operation, mentioned they were going to award bonuses to the customer engineers if they could achieve their target sales forecasts. In July, Chris Maynard, whose sales were up 22 percent over the previous year, asked Matson whether total sales were ahead of the target needed for the bonus. Matson said that while sales were up for the year, the plant still had excess capacity and it appeared they would not achieve the forecast.
Accounting system A job order cost system is used to accumulate direct labor and direct materials to individual jobs. At the end of the day, employees fill out a time sheet indicating the jobs they worked on and the time spent on each job. All the indirect costs are accumulated into a separate overhead cost pool for each factory department (pressing, drilling, and welding). The indirect costs for each department include equipment depreciation and lease charges, the department supervisor’s salary, employees’ idle time, and allocated utilities and occupancy charges (property taxes, plant building depreciation). Then, separate overhead rates are set for each department using direct labor hours as the allocation base. When an employee posts time to a particular job, the overhead rate for the employee’s department multiplied by the employee’s time charged to the job is the amount of overhead for that department charged to the job.
Problem with the Lingle Aerospace job Chris Maynard contacts Phil Sanchez, supervisor of the welding department, and asks about the discrepancy between Maynard’s estimate of 6.0 hours in the welding department and the 9.5 hours actually charged to the LA contract. Sanchez admits that there were two other jobs in the welding department at that time and that it is possible the employee had mistakenly charged some time to the LA contract instead of the other jobs. Maynard then asks Linda Rawlings, supervisor of the drilling department, about the 67 labor hours charged to LA. Maynard had estimated the drilling time to be 53 hours for the batch. Rawlings said she was too busy now to look into the matter but she would contact him later. That was two weeks ago. Maynard is concerned that if the costs charged to the LA contract are too high, Phil Matson will ask LA for a higher price. If this happens, LA might shift the radar housing from Heath to another supplier.
Absorption Cost Systems 447 When Jack Spence learned of the accounting errors on the LA account, he replied, “I don’t see any problem. As long as the time cards are charged to jobs, our tax returns are right.” Required:
a. Identify various problems at Heath.
b. What improvements would you suggest Heath implement?
Portable Phones, Inc. Portable Phones, Inc., manufactures and sells wireless telephones for residential and commercial use. Portable Phones’ plant is organized by product line, with five phone assembly departments in total.
Each of these five phone assembly departments is responsible for the complete production of a particular phone line, including manufacturing some parts, purchasing other parts, and assembling the unit. Each of the five phone assembly department managers reports to a product-line manager who has profit responsibility for his/her product. These five product-line managers have authority over pricing, marketing, distribution, and production of their product. Each of the five phone assembly departments is a cost center within its respective product-line profit center.
A key component of each phone is the circuit board(s) containing the integrated circuit chips. Each phone assembly department purchases from outside vendors the basic boards and chips to be attached to its board(s). The board department of the plant receives the boards and chips in kits from each phone assembly department and assembles them into completed boards ready for assembly into the phones. The board department (with a cost structure that is 80 percent fixed and 20 percent variable) uses a single highly automated assembly line of robotic insertion machines to precisely position each chip on the board and soldering machines to solder the chips onto the board.
The board department is a common resource for the plant; all five of the phone assembly departments use the board department to assemble some or all of their boards. Since the board department has a single assembly line, it can only assemble boards for one type of phone at a time. The assembly departments have authority to seek the most competitive supplier for all their parts and services, including circuit board assembly. The board department’s assembly schedule is determined at the beginning of each month. The five assembly departments request a time during the month when they plan delivery of particular kits to the board department and specify the number of boards to be assembled. The manager of the board department then takes these requests and tries to satisfy the assembly departments’ requests. However, the board department manager finds that she has a peak load problem; the assembly departments tend to want their boards assembled at the same time. The only way to satisfy these requests is to work overtime shifts during these peak periods even though the board department has excess capacity at other times of the month.
The total monthly costs of the board department (equipment depreciation, maintenance, direct labor, supervision, and engineering support) are assigned to the phone assembly departments based on an hourly rate. The board department’s total monthly costs are divided by the number of hours of capacity in the month (e.g., if a particular month has 22 working days, this is equivalent to 352 hours or 22 days 2 shifts 8 hours per shift) to arrive at a charge per hour. To give the phone assembly departments incentives to have their kits (boards and chips) delivered to the board department in a timely manner, the phone assembly department is charged for the time from when the last job (a batch of boards assembled for a phone assembly department) was finished by the board department until the time when the next job is finished. For example, suppose phone assembly department A’s phones were finished at 9:00 a.m., and that department B delivered its kits at 1:00 p.m. and they were completed at 7:00 p.m. the same day. Department B would be charged for 10 hours of the board department’s costs even though the board department was idle for 4 of the 10 hours. When first installed, the board department was expected to be operating at full capacity, two shifts per day, six days per week. But due to increased competition and outsourcing of some models, the board department is now operating at about 70 percent of the initial planned capacity.
a. If you manage a phone assembly department, when during the month would you tend to request that your phone circuit boards be assembled by the board department (everything else being held constant)? Explain why.
b. Identify various dysfunctional behaviors likely to occur among the phone assembly departments and the board department.
c. What management changes would you suggest? In particular, what changes would you make in the accounting system? Explain why each change should be made.
After reading through Chapter 9, read “Case 9-1 and 9-2” and compose a paper with answers to the questions at the end of the case. Include as much detail to support your answers as possible, as your grade for this assignments is impacted by your thought process as well as your accuracy.
Attached is a word document of the Textbook