The case study involves the labors cost management on the basis of forecasted demands. The demand for the entire period has been grouped into six bimonthly (2-month) periods. Moreover, the for better future budgetary and strategic controls, Kangaroo P/L has also clearly identified specific criterions like working hours, labor cost per hours for normal and overtimes hours, inventory holding cost etc. Currently, Kangaroo P/L has 22 employees and as per the forecasted demand, the company will recruit and make their labors to work for overtime. The prime aim of this paper is to offer the best strategy where per unit labor cost will be the lowest.
Direct labor cost is variable costs which fluctuate with the production. Unlike fixed overheads, controlling the variable costs is more challenging and it requires more financial strategic depth. For developing strategies the direct labors cost, the primary aim will be to minimize the number of the labors. In the process, the manufacturing companies can either install the machineries that will reduce the necessity of labors or can offer attractive overtime compensation. Installing a new machinery will required one time capital expenditure that might not be possible for the organizations with weak financial positions. Hence, many organizations try to find other ways to reduce numbers of labors like overtime compensation (ACQWeb, 2009). Question 1 a) How many employees will be needed during the peak demand of 610 units in period 5 if no overtime production is to be scheduled? In the period 5, the demand for product will be the highest and currently, the company has 22 employees. However, as per the product demand in period 5, 22 labors will not be able to meet the production demand by working regular hours. Hence, the necessary required labors for the period have been calculated in the table below. Table 1 Question 1a Period 5 Production in Unit for two months 610 Hours required for each units 20 Each employee working hours per month 352 Total working hours required for producing 610 of products in two months 12200 Total workers required for producing 610 units in the period 35 In the above tables, the necessary data have been given like product demand in period 5 and per employee monthly working hours. If each product requires 20 hours of working then total required hours to produce 610 units is 12200 in two months. Therefore, total labors required from the period are 35. Working notes:- Production in Unit for two months = 610 Hours required for each units = 20 Therefore, total working hours required for producing 610 of products in two months = 610*20 = 12200 Each employee working hours per period = 352 Therefore, total workers required for producing 610 units in the period = 12200/352 = 35 b) What will be the average cost of labor for each unit if the company maintains for the entire year sufficient staff to meet the peak demand without overtime? In the previous question, the labors required for meeting the demand in the peak period (i.e. period 5) are 35. In order to meet the demand during period 5, the company can maintain 35 labors in each period. In this case, the average cost of labor per employee will increase as in other periods, 35 labors will not be required. Therefore in order to assess the influence of maintaining 35 labors in each month on average per unit labors cost, the following table shows necessary calculations. Table 2 Period 1 2 3 4 5 6 Total Forecast Demand (Standard Units of Work) 400 380 470 530 610 500 2890 Labor required during peak period 35 35 35 35 35 35 210 Labor working hours for each period 12320 12320 12320 12320 12320 12320 73920 Labor cost for each period $73,920 $73,920 $73,920 $