: Planning strategies at Kangaroo P/L - Case Study Example

?Case Study: Planning strategies at Kangaroo P/L Contents Contents 2 Introduction 3 Question 4 Question 2 7 Question 3 10 Question 4 11 Conclusion 14 Reference 16 Bibliography 16 Planning strategies at Kangaroo P/L Introduction This paper deals case study of Kangaroo P/L and aims to offers answers of the specific questions. The case study involves the labors cost management on the basis of forecasted demands. The demand for the entire period has been grouped into six bimonthly (2-month) periods. Moreover, the for better future budgetary and strategic controls, Kangaroo P/L has also clearly identified specific criterions like working hours, labor cost per hours for normal and overtimes hours, inventory holding cost etc. Currently, Kangaroo P/L has 22 employees and as per the forecasted demand, the company will recruit and make their labors to work for overtime. The prime aim of this paper is to offer the best strategy where per unit labor cost will be the lowest. Direct labor cost is variable costs which fluctuate with the production. Unlike fixed overheads, controlling the variable costs is more challenging and it requires more financial strategic depth. For developing strategies the direct labors cost, the primary aim will be to minimize the number of the labors. In the process, the manufacturing companies can either install the machineries that will reduce the necessity of labors or can offer attractive overtime compensation. Installing a new machinery will required one time capital expenditure that might not be possible for the organizations with weak financial positions. Hence, many organizations try to find other ways to reduce numbers of labors like overtime compensation (ACQWeb, 2009). Question 1 a) How many employees will be needed during the peak demand of 610 units in period 5 if no overtime production is to be scheduled? In the period 5, the demand for product will be the highest and currently, the company has 22 employees. However, as per the product demand in period 5, 22 labors will not be able to meet the production demand by working regular hours. Hence, the necessary required labors for the period have been calculated in the table below. Table 1 Question 1a Period 5 Production in Unit for two months 610 Hours required for each units 20 Each employee working hours per month 352 Total working hours required for producing 610 of products in two months 12200 Total workers required for producing 610 units in the period 35 In the above tables, the necessary data have been given like product demand in period 5 and per employee monthly working hours. If each product requires 20 hours of working then total required hours to produce 610 units is 12200 in two months. Therefore, total labors required from the period are 35. Working notes:- Production in Unit for two months = 610 Hours required for each units = 20 Therefore, total working hours required for producing 610 of products in two months = 610*20 = 12200 Each employee working hours per period = 352 Therefore, total workers required for producing 610 units in the period = 12200/352 = 35 b) What will be the average cost of labor for each unit if the company maintains for the entire year sufficient staff to meet the peak demand without overtime? In the previous question, the labors required for meeting the demand in the peak period (i.e. period 5) are 35. In order to meet the demand during period 5, the company can maintain 35 labors in each period. In this case, the average cost of labor per employee will increase as in other periods, 35 labors will not be required. Therefore in order to assess the influence of maintaining 35 labors in each month on average per unit labors cost, the following table shows necessary calculations. Table 2 Period 1 2 3 4 5 6 Total Forecast Demand (Standard Units of Work) 400 380 470 530 610 500 2890 Labor required during peak period 35 35 35 35 35 35 210 Labor working hours for each period 12320 12320 12320 12320 12320 12320 73920 Labor cost for each period $73,920 $73,920 $73,920 $73,920 $73,920 $73,920 $443,520 Average labor for each period $153.47 As per the above table, the per unit labors cost by maintaining 35 employees in each period is $153.47 per unit. Working notes:- Period 1 2 3 4 5 6 Total (a) Forecast Demand (Standard Units of Work) 400 380 470 530 610 500 2890 (b) Labors required during peak period 35 35 35 35 35 35 210 (c) Labors working hours for each period [(b)*(f)] 12320 12320 12320 12320 12320 12320 73920 (d) Labor cost for each period [(c)*(g)] $73,920 $73,920 $73,920 $73,920 $73,920 $73,920 $443,520 (e) Average labor for each period [total labor cost/total forecast demand] $153.47 (f) Each employee working hours per period 352 (g) labor cost per hour 6 c) What percentage above the standard-hour cost is the company’s average cost of labor per unit in this year due to the company’s decision to maintain stable employment sufficient to serve the peak demand period without overtime? Based on the existing the policy, per units required labors hours is 20 hrs and per labors compensation for each hour is $6. Therefore, on an average the per unit labors cost will be $120. The following table has presented this. Table 3 Question 1c Labor cost per hour without overtime $6.00 Hours required for each units 20 Average cost of labor for each product $120.00 Average per unit labor cost for period 5 $153.47 percentage above the standard-hour cost 128% By maintaining 35 employees in each period, per unit labor cost is $153.47 and standard-hour cost is the company’s average cost of labor per unit is $120.00. Therefore, the average cost of labor will increase by 128% if company will maintain 35 labors in each period. Working notes:- Labor cost per hour without overtime = $6 Hours required for each units = 20 Hence, average cost of labor for each product = 6*20 = 120 Average labor for each period = 153.47 Hence, percentage above the standard-hour cost = (153.47-120)/(120+1) = 128% Question 2 The company is considering using overtime subject to a maximum of 25 percent of regular-time hours. What is the average cost per unit if the work force is maintained at a level so that overtime can be used to the maximum of 25% of regular hours during the peak period in period 5? Answer In the previous section it has been discussed that how employees will be needed during the peak hours if no overtime is used. The entire discussion in the previous section was on the basis that no overtime will be used. In this part the use of over time has been considered. In this question it has been asked to calculate the cost per unit during of the fifth period. In the fifth period the demand is expected to be 6100 units. To meet up this demand the company can use only 25% of regular working hours as overtime. The company has also the provision of hiring more employees. Therefore with the help of algebraic equation the regular working hours had been deduced as follows: If ‘x’ is the total regular working hours to be used then x +.25x = 610*20 or x = 9760 Once the total regular working hours and the overtime hours are computed then the number of employees required for that period had been deduced with the help of the available data. After computing the total number of employees required for that period then the total cost of production has been found out. The forecasted cost per unit during the peak time is given below: demand of the 5th period (units) 610 overtime .25 of regular working hours time required to produce one unit 20 each employees working hours per month 176 each employees working hours per period 352 working hours required for the 5th period 12200 regular working hours required for the 5th period 9760 over time 2440 number of employees required 27.72727273 number of employees required (approx) 28 rate of normal working hour ($) 6 rate of over time hour ($) 9 cost of normal working hours ($) 58560 cost of overtime hours ($) 21960 employees already available 22 employees hired 6 cost of hire ($) 2400 total cost of the units 82920 cost per unit ($) 135.9344262 Working notes:- Time required producing one unit = 20 hrs Each employees working hours per month = 176 Each employees working hours per period = 176*20= 352 Working hours required for the 5th period = 610*20= 12200 Regular working hours required for the 5th period = 9760 Over time = 9760*.25 = 2440 Number of employees required = 9760/352 = 27.72 or 28 (approx) Cost of normal working hours ($) = 6*28= 58560 Cost of overtime hours ($) = 9*2440 = 21960 Cost of hire ($) = 400*6 = 2400 Total cost of the units = 2400+21960+58560 = 82920 Average cost per unit ($) = 82920/610= 135.93 Question 3 a) Find the employment level for each bimonthly period. Answer period hours for each product regular work hr per employee workers regular work hrs of total employees regular compensation per hour overtime compensation per hour demand required labors hrs maximum overtime(25% of regular working hrs) required overtime overtime used 1 20 352 22 7744 6 9 400 8000 1936 256 256 2 20 352 22 7744 6 9 380 7600 1936 0 0 3 20 352 22 7744 6 9 470 9400 1936 1656 1656 4 20 352 25 8800 6 9 530 10600 2200 1800 1936 5 20 352 25 8800 6 9 610 12200 2200 3400 2200 6 20 352 28 9856 6 9 500 10000 2464 144 144               2890         b) Find the total payroll-related costs for the year. Answer cost of regular hours for total employees cost of overtime used cost of hire cost of lay off period 46464 2304 0   1 46464 0 0   2 46464 14904 0   3 52800 17424 1200   4 52800 19800 1200   5 59136 1296 0 3000 6 304128 55728 2400 3000  total c) What cost per unit results from these payroll-related costs? Answer (a)units produced 2890 (b) total cost 365256 cost per unit [(b)/(a)] 126.3862 The total cost of production includes the labor cost including the cost of overtime and the cost of hiring as well as the cost of layoff. Question 4 The company plans to maintain a constant production rate, begin and end the year with the same inventory level, and absorb all demand fluctuation by accumulating and depleting inventory. The number of employees will be set at a level so that no overtime will be required. What will be the average cost per unit due to the cost of labor and the additional inventory held during the year? Answer The company wants to maintain the same inventory level at the beginning and at the end of the period. In the case it has been mentioned that the company started the forecasted year with no inventory therefore the company will also end the year with nil inventory level. The company also wants to maintain an equal production level during the year which will be adjusted with the periodical demand during the year. In the case it also has been mentioned that the company started the year with 22 numbers of employees and at the end of the year it will retain 22 employees only. This indicated that if any hiring takes place during the year there will be lay off too. As the company wants to maintain an equal level of production during the year therefore the production level must be near to the average demand of the units during the year. After considering all these criteria the inventory level of each period and the total number of employees during the year has been analyzed. The total cost of production and the cost of unit during the period are given below: Table 4: Cost of Holding Inventory period demand production balance rate of inventory cost of inventory 1 400 481.67 81.67 6 490.02 2 380 481.67 183.34 6 1100.04 3 470 481.67 195.01 6 1170.06 4 530 481.67 146.68 6 880.08 5 610 481.67 18.35 6 110.1 6 500 481.67 0 6   Table 5: Cost of Production per Unit number of periods 6 time required to produce one unit (hrs) 20 time required to produce per period (hrs) 9633.4 periodic production 481.67 each employees working hours per period 352 number of employees required 27.36761 number of employees at the beginning and at the end of the year 22 number of employees to be hired 5 number of employees to be laid off at the end of the period 5 rate of normal working hour ($) 6 cost of labor ($) 346802.4 cost of hiring ($) 2000 cost of layoff ($) 2500 cost of inventory($) 3750.3 total cost of the units produced ($) 355052.7 total units produced 2890 cost per unit ($) 122.8556 Working notes:- 1) Periodical production = 481.67 [satisfy the condition of same level of opening and closing inventory level that is nil inventory, found through trial and error method] Time required to produce one unit (hrs) = 20 Time required to produce per period (hrs) = 20*481.67 = 9633.4 Each employees working hours per period = 352 Number of employees required = 9633.4/352 = 27 Number of employees to be hired = 27-22 = 5 Number of employees to be laid off at the end of the period = 5 Cost of labor ($) = 6*9633.4*6= 346802.4 Cost of hiring ($) = 400*5 = 2000 Cost of layoff ($) = 500*5 = 2500 Cost of inventory ($) = 3750.3 (refer working note 2) Total cost of the units produced ($) = 346802.4+2000+2500+3750.3= 355052.7 Total units produced= 2890 Cost per unit ($) = 355052.7/ 2890 = 122.8556055 2) Cost of inventory (a)Demand (b)production (c)balance (b) +balance of preceding period -(a) (d)rate of inventory cost of inventory (c)*(d) 400 481.67 81.67 6 490.02 380 481.67 183.34 6 1100.04 470 481.67 195.01 6 1170.06 530 481.67 146.68 6 880.08 610 481.67 18.35 6 110.1 500 481.67 0 6   total       3750.3 Conclusion In this project the cost of production has been valued from many respects. The company can produce the forecasted units to meet up the demand in many ways. It can use only the normal working hours and hire more employees in order to avoid overtime costs. It can also use more over time and hire less employees. It can also maintain same production level and can practice a mixed strategy of hiring and using overtime. In any case the company will incur costs related to pay roll but the main aim of every company is to reduce the pay roll related costs which will in turn reduce the costs of production and hence the company can achieve more operating profit. In the present case the company will incur minimum cost per unit during the year if no overtime is provided. If the company provides overtime then it will incur more cost per unit as shown in answer 3. Reference ACQWeb. (2009). Ch 7 - Analyzing Direct Labor Costs. [Pdf]. Available at: http://www.acq.osd.mil/dpap/cpf/docs/contract_pricing_finance_guide/vol3_ch7.pdf. [Accessed on September 28, 2011]. Bibliography Khan, M. Y. and Jain, P. K. (2008). Cost accounting and financial management for CA Professional Competence Examination 3rd ed. India: Tata McGraw-Hill Education. Kinney, M. R. and Raiborn, C. A. (2008). Cost Accounting: Foundations and Evolutions 7th ed. USA: Cengage Learning. Horngren, C. T. et al. (2009). Cost Accounting. India: Pearson Education India. Tulsian, P. C. (2008). Cost Accounting. India: Tata McGraw-Hill Education. Read More