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Gainsharing

This is a problem from my Management Accounting textbook by Kaplan, Young, and Atkinson - fourth edition. It is about gainsharing.

A company manufactures breakfast cereals. The production workers are part of a gainsharing program that works like this: A target level of labor costs is set based on the achieved level of production. If the actual level of labor costs is less than the target level of labor costs, the difference is added to a cumulative pool that is carried from year to year. If the actual level of labor costs exceeds the target level, the amount of the excess is deducted from the cumulative pool.

If the balance of the pool is positive at the end of any year, the employees receive half the balance of the pool as a part of a gainsharing plan and the balance of the pool is reset to zero. If the balance of the pool is negative at the end of any year, the employees receive nothing and the negative balance is carried to the following year.

In any year when the target level of costs exceeds the actual level of costs, the target level for the following year is based on the actual level of cost performance in the previous year.

So, suppose that the target level of performance is set using the following labor use standards:
1. .15 labor hour per case of cereal A
2. .10 labor hour per case of cereal B
3. .20 labor hour per case of cereal C
4. .25 labor hour per case of cereal D

During the last year, production levels of cereals A, B, C, and D were 200,000 cases, 220,000 cases, 130,000 cases, and 240,000 cases respectively. The company used 120,000 labor hours during the year, and teh average cost of labor was $16 per hour. What is the amount available for distribution to employees under this gainsharing program?

Solution Preview

In order to determine the gainsharing, we need to calculate the target number of labor hours and compare it with the actual. If the actual is less than the target, then there would be gainsharing. To calculate the traget number of labor hours, we multiply the labor hour per case with the number of ...

Solution Summary

The solution explains how to calculate the amount available for distribution to employees under gainsharing

$2.19