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Peoria Engine Plant Case Solution & Answer

Peoria Engine Plant Case Solution

Introduction

The Peoria Engine Plant case is based on the cost control measures used for controlling the labor and the overhead costs used at the engine production plant. The finance department at Peoria Engine Plant prepares the variance reports for daily, weekly and monthly basis against the budgeted figures. In different meetings, the finance staff members, plant manager and the department supervisors have a discussion regarding the usage and interpretations of the variance reports. The case also describes the budgeting procedures used by the company to bring cost reductions and annual productivity gains. The key question to be addressed in the case is to determine whether the detailed variance analysis encourage the mangers’ objective of cost cutting, learning and improvement. The major consideration is whether these short-run variance budgets improve the quality and production in the long-run or not.

Problem Statement

The labor and overhead costs at Peoria Engine Plant are composed of the 20% total costs but the management spends almost 90% of their perspiration over monitoring and controlling these costs. The finance staff produces variance budgets on daily, monthly and weekly basis, but still there is an existence of numerous variances in the labor and manufacturing overhead costs. The management at Peoria Engine Plant is concerned regarding the viability of these short run variance budgets over the long term quality production.

1.Company Background

Peoria Engine Plant is among the six engine suppliers in the North American division of the Worldwide Motors. The key products of the company include a 5.9 liter engine (used in trucks) and a 3.6 liter engine (used in cars). The company goes through a series of processes, which seems more like a lively amusement park, in order to produce engines to be supplied to the Worldwide Motors assembly plants in the overall United States. The company has been maintaining a sound financial performance. In 1992, the company was producing 2500 engines per day and 600000 engines on an annual rate. The annual sales in the same period amounted to $1.2 billion per year, while the cost of goods sold remained at $960 million.

Situational Analysis

Bottlenecks in Production

Just in Time Production

Though just-in-time production is used to reduce the overall costs by reducing the production processes and excessive WIP and inventory levels. But in case of Peoria Engine Plant; the company has been facing inventory shortages, which further leads to idle machines and idle labor, ultimately increasing the production costs to undesired level.

Machine Breakdowns

Due to an improper management and maintenance levels at Peoria Engine Plant; the machine breakdowns have become very common. These machine breakdowns lead towards an inefficient as well as an ineffective productive levels by the labors. The company is unable to meet the production standards of the industry and the demand of the market. This situation further deteriorates the plant’s financial performance and overall cost structures.

·Idle Labor

The labor management is pathetic at Peoria’s engine plant. The superintendent of the largest production department, i.e. Hal Green states  that sometimes they have to work on the shortages created by other departments, which occurs frequently without any prior knowledge, which demands an excessive labor. These production shortages and excessive labor increase the company’s cost structures. Keeping excess employees for working on production shortages further lead to idle labor because of uncertain machine breakdown, further weakening the efficiency and performance of the workers.

·Less Production Capacity

The production capacity per person at PEP is less than the industry standards. Appendix 1 shows the engines produced per person on a monthly basis, for the year 1992. The company’s productivity objective for 3.6 liter engine included 2.5 engines per person and 1.95 engines per person for 5.9 liter engine category. In comparison to which, the Japanese plants have a production output of 3 engines per person. The company’s production is less than the industry, because the company’s production facility is mostly depreciated, with frequent machine break down and less plant production capacity. Moreover, the company’s funding is scarce to fund the new capital investment, which could lead towards a higher production capacity, efficiency and financial performance.

·Improper Job Descriptions

The work schedules and task assignments are mismanaged at the plant. It is because the production supervisors, who need to monitor the productivity levels, smooth workflow and availability of labors, are required to prepare the daily variances in production. These tasks must be assigned to the accounting department as it reduces monitoring efforts by the supervisors, which is the main reason behind production shortages and frequent machine breakdowns.

·Unnecessary Variances

The supervisors and the finance staff have been putting their extraordinary efforts in maintain the unnecessary variance reports. The variances are calculated manually on a daily, weekly and monthly basis. It consumes the employees’ energy, time and efforts, which could have been utilized in improving the plant productivity. Due to such an extensive variance reporting; the key information – which needs to get focused, is missed by the senior management.

·High Scrap Rates

The company’s scrap rates are high, which lead towards reduced production and increased production and labor variances. The scarp rates have increased over the time (See Appendix 2). The company’s main reason behind high scrap rates are the outside suppliers, which the company needsto address, as the scrap rates lead to a high cost and inefficient production.

2.Variance Analysis

The company’s finance staff prepares the daily, weekly and monthly variance reports. There exists a very high direct labor variance of -42.95% in department 4 and a -30.4% variance in the in department 9 (See Appendix 3). The actual working hours in all of the departments exceed the budgeted working hours, which shows clearly the availability of idle labor due to production shortages in different departments. Similarly, the weekly indirectly labor variances are very high in department 9 and area 3 of 142.1% and 106.1%, respectively (See Appendix 4).

These high variances shows the company’s inability to manage its operations effectively and efficiently. The company’s actual figures are diverting extensively from the budgeted, which is clearly the result of poor company’s management and production inefficiencies…………………..

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