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 Category A will solve Requirement 1, groups of Category B will solve Requirement 2, and groups of Category C will solve Requirement 3. After preparing an answer to each requirement, new groups will be formed made up of two members from A, two members from B, and two members from C. Members of A will share their answer to Requirement 1 with the other group members, followed by B members sharing their answer with other group members, and finally, C members sharing their answer with the other group members. (Note: The structure may be adapted to class size—the critical idea is to have three types of groups © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part who solve each part and then come together to share with each other the answers to the other requirements.) Explain why Howard stopped inspections on the bolts and reassigned inspectors to production and materials handling. Discuss the ethical ramifications of this decision What features in the financialbased responsibility accounting system provided the incentive(s) for Howard to take the actions described? Would an activitybased responsibility accounting system have provided incentives that discourage this kind of behavior? Explain What likely effect would Howard’s actions have on the quality of the bolts? Was the decision justified by the need to obtain renewal of the contract, particularly if the plant returns to a normal inspection routine after the rush order is completed? Do you have any suggestions about the quality approach taken by this company? Explain why activitybased responsibility accounting might play a useful role in this setting © 2015 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part