Question

Lilibeth Company makes furniture. The owner, Ken Jones, started the business several years ago in his garage. He initially did a lot of the manual labour with the help of a few friends. The company has since expanded into a large warehouse and new employees have been hired. Ken is no longer directly involved with production and is concerned about his ability to plan for and control the company. He is considering the implementation of a standard cost system.

Describe how Ken could use standards for the purposes of planning and motivating employees and the problems in using standards as performance measures.

Answers should focus on the use of standards as performance measures in light of Ken’s company, as well as some behavioural implications.
(don’t need to write full page essay, only highlight key issues/points).

Answer 1

Ken can use the Standard cost system for planning and motivating the employees and resolve the related problems:

a) The norms of use of material to prepare or manufacture the product or output. The labor knows the ratio of the output to input. The labor can prevent the abnormal loss of materials through the knowledge of Material usage norms.

b) The labor very well knows about the standard labor rate per unit of output. So, the labor can construct the period wages by producing the requisite units of output.

c) The standard labor hours used to produce each unit of output can help the labor to plan its production rate and earnings.

d) Standards of units expected to sold can help the labors to get motivated towards recognition of their work. The security of the job to the labor comes from the high standards of units sold and Sales.

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