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CHAPTER 12
Activity-Based Management
COLLABORATIVE LEARNING EXERCISE
OBJECTIVE 5
Howard Johnson, plant manager, was given the charge to produce 120,000 bolts used in the
manufacture of small twin engine aircraft. Directed by his divisional manager to give the bolt
production priority over other jobs, he had two weeks to produce the units. Meeting the
delivery date was crucial for renewal of a major contract with a large airplane manufacturer.
Each bolt requires 20 minutes of direct labor and five ounces of metal. After producing a
batch of bolts, each bolt is subjected to a stress test. Those that pass are placed in a carton,
which is stamped “Inspected by inspector no. ____” (the inspector’s identification number is
inserted). Defective units are discarded, having no salvage value. Because of the nature of the
process, rework is not possible.
At the end of the first week, the plant had produced 60,000 acceptable units and used
24,000 direct labor hours, 4,000 hours more than the standard allowed. Furthermore, a total
of 65,000 bolts had been produced and 5,000 had been rejected, creating an unfavorable
materials usage variance of 25,000 ounces. Howard knew that a performance report would be
prepared when the 120,000 bolts were completed. This report would compare the labor and
materials used with that allowed. Any variance in excess of 5 percent of standard would be
investigated. Howard expected the same or worse performance for the coming week and was
worried about a poor performance rating for himself. Accordingly, at the beginning of the
second week, Howard moved his inspectors to the production line (all inspectors had
production experience). However, for reporting purposes, the production hours provided by
inspectors would not be counted as part of direct labor. They would still appear as a separate
budget item on the performance report. Additionally, Howard instructed the inspectors to
pack the completed bolts in the cartons and stamp them as inspected. One inspector objected;
Howard reassigned the inspector temporarily to materials handling and gave an inspection
stamp with a fabricated identification number to a line worker who was willing to stamp the
cartons of bolts as inspected.
Required:
Form groups of six and divide these groups into three categories: A, B, and C. Groups of