Reference no: EM13939122

SETTING A DIRECT LABOR STANDARD, LEARNING CURVE EFFECTS, SERVICE COMPANY

Mantenga Company provides routine maintenance services for heavy moving and trans- portation vehicles. Although the vehicles vary, the maintenance services provided follow a fairly standard pattern. Recently, a potential customer has approached the company, requesting a new maintenance service for a radically different type of vehicle. New servic- ing equipment and some new labor skills will be needed to provide the maintenance serv- ice. The customer is placing an initial order to service 150 vehicles and has indicated that if the service is satisfactory, several additional orders of the same size will be placed every three months over the next three to five years.

Mantenga uses a standard costing system and wants to develop a set of standards for the new part. The usage standards for direct materials such as oil, lubricants, and trans- mission fluids were easily established. The usage standard is 25 quarts per servicing, with a standard cost of $4 per quart. Management has also decided on standard rates for labor and overhead: The standard labor rate is $15 per direct labor hour, the standard variable overhead rate is $8 per direct labor hour, and the standard fixed overhead rate is $12 per hour. The only remaining decision is the standard for labor usage. To assist in developing this standard, the engineering department has estimated the following relationship between units serviced and average direct labor hours used:

Units Serviced	Cumulative Average Time per Unit (hours)
40	2.500
80	2.000
160	1.600
320	1.280
640	1.024

As the workers learn more about servicing the new vehicles, they become more efficient, and the average time needed to service one unit declines. Engineering estimates that all of the learning effects will be achieved by the time that 320 units are produced. No further improvement will be realized past this level.

Required:

1. Assume that the average labor time is 0.768 hour per unit after the learning effects are achieved. Using this information, prepare a standard cost sheet that details the standard service cost per unit. Round costs to two decimal places.

2. Given the per-unit labor standard set, would you expect a favorable or an unfavorable labor efficiency? Explain. Calculate the labor efficiency variance for servicing the first 320 units.

3. Assuming no further improvement in labor time per unit is possible past 320 units, explain why the cumulative average time per unit at 640 is lower than the time at 320 units. Show that the standard labor time should be 0.768 hour per unit. Explain why this value is a good choice for the per-unit labor standard.