Textbook Problem

Gordon Company produces custom-made machine parts. A setup activity is required for the batches of parts that it produces. Activity output is measured using setup hours. The value-added standard (SQ) for this activity is zero. On July 1, at the beginning of the fiscal year, 10 setup hours were allowed and used per batch. The standard wage rate for setup labor is $20 per setup hour. During the first quarter of the new fiscal year, the company is planning to implement a new setup method developed by Gordon’s industrial engineers that is expected to reduce setup time by 40 percent. The new procedure was implemented during the first quarter and the improvement expected was realized.

Required:

1. 1. What is the setup standard for setup hours and the associated expected cost at the beginning of the first quarter? The kaizen standard and expected associated cost?
2. 2. What is the setup standard for setup hours and the associated cost at the end of the first quarter? Explain. What is the next step in the kaizen cost reduction process?
3. 3. What if the new procedure implemented in the first quarter only produced a 30 percent reduction in setup time instead of the expected 40 percent reduction? What would the new maintenance standard and cost be? What criteria would you logically expect to be met before maintenance standards and costs are modified?