Accounting for Managers

ACCOUNTING FOR MANAGERS
Please read the case study given below and answer questions given at the end.

Case Study
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

Rs5,950
U

Rs6,300
U

Rs933
U

Rs1,167
U

Quantity Variances:
Variance based on labor
standard
(one unit each 30 minutes)

Rs3150 Rs2,800 Rs3,850 Rs5,250
U*
U
U
U

Variance based on cost standard Rs2,800 Rs3,033 Rs1,633
(one unit each 40 minutes)
F
F
F

-0-

*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.

1.

Describe the impact of different types of standards on motivations, and specifically,
the likely effect on motivation of adopting the labor standard recommended for Geeta &
Company by the engineering firm.
2. Please advise the company in reviewing the standards.

Quantitative Techniques in management
Please read the case study given below and answer questions given at the end.
Case study:
Kushal Arora, a second year MBA student, is doing a study of companies going public
for the first time. He is curious to see whether or not there is a significant relationship between
the sizes of the offering (in crores of rupees) and the price per SHARE after the issue. The
data are given below:
Size (in
crore of
rupees)
Price ( in
rupees)

1.

108

39

68.40

51

10.40

4.40

12

13

19

12

6.50

4

You are required to calculate the coefficient of correlation for the above data set and
comment what conclusion Kushal should draw from the sample.