Management at Glover & Lamb Inc. is concerned about controlling factory labor -

Question

Management at Glover & Lamb Inc. is concerned about controlling factory labor - related cost. The followingsummary is the result of an analysis of the major categories of labor cost for 2013:

Category                               Amount

Base wages                           63,000,000

Health Care benefits                10,500,00

Payroll taxes                           5,018,832

Overtime                                 8,697,600

training                                    1,875,000

retirement benefits                   6,898,500

workers comp                           1,199,00

Following are some of the potential cost drivers identified by the company for labor-related costs, along with their 2013 volume levels:

Potential Activity driver                                               2013 volume level

average number of factory employees                          2100

number of new hires                                                      300

number of regular labor hours worked                           3,150,000

number of overtime hours worked                                  288,000

total factory wages paid                                                 71,697,600

volume of production in units                                         12,000,000

number of production process changes                         600

number of production schedule changes                       375

a) For each cost pool, determine the cost per unit of the activity driver using the activity driver that you believe has the closest relationship to the cost pool.

b)Based on your judgements and calculations in (a), which activity driver should receive the most attention from company managers in their efforts to control labor-related cost? How much of the total labor-related cost is attributal to this activity driver?

Explanation / Answer

Base wages: =$63,000,000/ 3,150,000 = $20 per DLH

Health care: =$10,500,000/ 2,100 = $5,000 per worker

Payroll taxes: $5,018,832 / $71,697,600 = $0.07 per $1 of factory wage

Overtime: $8,697,600 / 288,000 = $30.20 per overtime hour

Training: $1,875,000 / 300 = $6,250 per new hire

Retirement: $6,898,500 2,100 = $3,285 per worker

Workers' compensation: $1,199,940 2,100 = $571.40 per worker

b. Although more labor-related items are driven by the number of factory workers, the base wages account for most of the labor cost.

c. It can be inferred that the use of overtime hours minimizes some cost drivers. In this example, use of overtime hours would help contain health care costs, training costs, retirement costs, and workers' compensation

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