CASE STUDY: LABOR STANDARD

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

Quantity Variances:
Variance based on labor
standard
(one unit each 30 minutes)
Variance based on cost
standard
(one unit each 40 minutes)

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

Rs5,950

Rs6,300
U

Rs2,800 Rs3,033
Rs1,633 F
F
F

Rs933

Rs1,167
U

-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.

Question 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.
Answer:
Different standards have different impact on motivation. In the given case,
where the labor standard recommended by the engineering firm is
adopted by Geeta & company, the six-month operation period showed a
decline in production and a UN favorable quantity variance for each of the
six months in the said period. In the other case where the management
used the internally set labor standard, there was a favorable quantity
variance for the first three months; thereby implying that the actual
production was more than the standard production. In the fourth month,
there was no variance in production and in the fifth and sixth month, there
was a UN favorable variance, thereby implying that the actual production
was less than standard production. Thus, we see that the standard
recommended by the engineering firm had a negative impact on
motivation as it was less than the standard production. But, in the case of
internally set standards, there was a positive impact on motivation for
first three months; neutral in the fourth month; and negative impact in
fifth and sixth month

Question 2: Please advise the company in reviewing the standards.

Answer:
The labor standard recommended by the consulting firm should not be
used as a motivational device as it is having a negative impact; the cost
standard used for reporting had a positive or neutral impact for greater
part of the period and a negative impact for two months. Therefore, the
company should try and adopt labor standards similar to those ones.