Question

15. Auburn Furniture Company makes a variety of wood furniture for the home and office. The company uses a standard costing system for its manufacturing costs. During a recent unexpected surge in demand, the company decided to use temporary employees from a local employment agency. The company used the temporary employees for two months, af- ter which managers stopped using them. There were many complaints from production foremen that the temporary employees were not very efficient. Ad- ditionally, customer service staff noted that during the two month time period when the temporary employees were working there was an increase in the number of units that had to be reworked and the number of units being returned by customers. Management is considering filing a lawsuit against the temporary employment company for providing workers who did not perform at the level of regular employees as had been promised by the employment company. Before filing the lawsuit, management would like to have some information about the possible damages in the case. What ac- counting and other information would you look at to assist management in evaluating possible damages?

Answer 1

For filing of Lawsuit against the employment company, Auburn furniture Company first need to calculate total damages to it due to the usage of temporary staff from the said external agency.

These damages includes:

1. Cost of Rework on units (Cost can be calculated by the additional Material consumed +(Additional Labor Time * Labor Standard rate)+ Overheads).

2. Cost of units returned from Customer( here cost includes all the cost of sale i.e. Cost of Material+Cost of labor + Variable Overheads+Fixed overheads +Packing cost+ Freight cost If Applicable (both to and fro Customer).

3. As these employees are not efficient as promised by employment company, we can calculate the cost of working hour lost due to inefficiency of these employees. For example if Regular employees takes 2 hours for hundred piece of finished goods but these temporary employees takes 3 hours for same quantity. We can conclude that here company lost it's 1 working hour. Cost can be calculated by = (Extra working hour * Standard Rate of Labor per hour)+ Overhead associated with it.

These are the total damages to the company.