Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 49

Productivity and Ethics Janice Interiors installs custom interiors for luxury mobile homes. In its most recent negotiation with the union, the firm proposed to share productivity gains in direct labor equally with the union. In return, the union agreed not to demand wage increases. Most union members, however, are skeptical about management’s honesty in calculating productivity measures. Nevertheless, union members voted to try the program. Kim Tomas, the management accountant responsible for determining productivity measures, collected these data at the end of 2010:

	2010	2009
Number of installations	560	500
Direct labor-hours	112,000	99,000

Steve Janice, the CEO, is very anxious to demonstrate the firm’s good intentions by showing the labor union a positive result. He suggests to Kim that some of the direct labor-hours are actually indirect. For example, some of the labor-hours are indirect because these hours cannot be allocated to specific types of work. Following his suggestion, Kim reclassifies 12,000 hours as indirect labor.

Required

1. Evaluate whether Steve’s suggestion to reclassify some of the direct labor-hours as indirect labor is ethical.

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2. Would it be ethical for Kim to modify her calculations?

Step 1 of 5

Productivity is the ratio of output to input. It is a measure of efficiency of the production or operation of any enterprise. A higher productivity shows that more output is produced for every input utilised. This measure is not only utilised to measure the performance of a manufacturing industry but can also be used by service industry.

It is a very good tool to measure the performance of the employees as well and thus can be used for performance linked bonus or incentive which could be great alternative for wage increase.