Gavin Thorpe, Production Director, is concerned about the handling of raw materials into production at the new
Question:
Gavin Thorpe, Production Director, is concerned about the handling of raw materials into production at the new production facility. Apparently, raw materials are not always placed in the correct production area quickly enough leading to delays in production and employee idle time. Gavin wonders part of the problem is that raw materials handling was only allocated a small budget. I've suggested that we re-think the budget for this function using a zero-based budgeting (ZBB) approach. I know that the original budget allows for two small forklift trucks and two operating staff who are responsible for picking raw materials from the warehouse and moving these into the appropriate production area. Other than the forklift trucks there is currently no automated lifting equipment.
Another area that Gavin is concerned about is the in-house Machinery Maintenance Department. The objective of the department is to ensure that all production machinery is kept in optimal working order to protect the quality and efficiency of production. It is responsible Tor regular 6- monthly routine maintenance of all machinery as well as dealing with repairs when required. Gavin is keen that the performance of the department is adequately monitored with the use of KPIs and has asked for suggestions.
On a different matter, we have been negotiating with a hotel chain to supply it with 500 hybrid mattresses. Gavin thinks this could lead to a large in orders in the future. He is now trying to decide if we should accept its latest price offer which is lower than our full cost. I've attached a schedule with information about the order.
Schedule
Costs associated with the potential hotel chain order | ||
Note | Cost item | Total cost for the 500 mattress (E$) |
I | Covering fabric | 22,500 |
II | Other raw materials | 32,500 |
III | Direct labor | 31,000 |
IV | Total production overheads | 52,000 |
V | Additional cost | 2,500 |
Total cost | 140,500 |
Notes:
- The cost of E$22,500 is for 3,750 square meters of covering fabric at a standard cost of E$6 per square meter. There are 4,000 square meters of covering fabric in inventory which is no longer used in normal production that could be used for this order. If not used for this order this covering fabric can be sold for E$2.50 per square meter. This covering fabric costs E$5.50 per square meter to purchase.
- The cost of E$32,500 is based on the standard cost of other raw materials. All of the other raw materials are in inventory and are currently used in normal production. Prices for these other raw materials have recently increased.
- The direct labor cost of E$31,000 is the standard cost of labor. Direct employees are paid for a fixed number of hours per week. There is spare capacity and therefore 75% of this order can be made during normal working hours. The other 25% will require overtime to be worked by the direct employees, for which they are paid a premium of 50% above the normal wage rate.
- The total production overheads of E$52,000 is the total of variable and fixed production overheads absorbed.
- In addition to the above, the hotel chain has asked for the name of the hotel to be stitched onto each mattress which will require hiring an embroidery machine at a cost of E$2,000. In addition, a Sales Manager has visited the company on a couple of occasions to discuss the order at a cost of E$500.
Required
Please prepare a briefing paper that I can send to Gavin which:
- Explain how a ZBB approach should be applied to create a budget for the raw materials handling function to help improve operational efficiency.
Suggest three KPIs which are appropriate for monitoring the performance of the Machinery Maintenance Department and explain why each of these is appropriate.
Explain whether each of the costs on the attached schedule (Notes I to V) are relevant or irrelevant costs of deciding whether to accept the order.
Business Statistics a decision making approach
ISBN: 978-0133021844
9th edition
Authors: David F. Groebner, Patrick W. Shannon, Phillip C. Fry