Additional End-of-Chapter Exercises for use with 7th Edition
Chapter 1
Hatley Motors
Hatley Motors is a Worldwide Motors Corporation (WMC) dealer. Hatley Motors is organized into four
departments: New Car Sales, Used Car Sales, Service, and Administration. Each department has a
manager. The managers of the New Car Sales, Used Car Sales, and Service are evaluated and rewarded
based on the contribution each provides to covering the costs in the Administration Department. The
department managers report to the dealership’s General Manager.
The Service Department repairs vehicles for retail customers, New Car Sales, and Used Car Sales. Some
of these repairs involve warranty and recall work. The Service Department has two types of service
technicians: Master Technicians and Service Technicians.
For each service job, a service advisor prepares a service order indicating a service code for each of the
job’s requirements. Each service order is likely to have multiple service codes. A Master Technician scans
the completed service order to assess whether the service requirements are complex or straightforward.
The Master Technicians work on service orders deemed complex. Service Technicians do all the work
deemed straightforward, as well as all warranty and recall work.
For straightforward work performed by Service Technicians, WMC provides dealers with the standard
work hours (called the book hours) for each service code. Each year WMC collects data on the hours to
complete each service code at all the dealers and uses the average of the ten best times recorded for
each service code to set the new standard hours allowed for that service code.
Costing for warranty and recall work is based on agreements between Worldwide Motors and its dealers.
All other work done by Service for retail customers and Used Car Sales is charged the total book hours
used to complete the job multiplied by the shop rate of $140 per hour. In addition, the customer is
charged for parts needed to complete the job. Parts are charged to the customer at cost plus 25%.
Customers can reclaim replaced parts but seldom pursue this option.
Master Technicians are paid a salary because they only work on repairs considered complex.
Service Technicians are paid a wage of $35 per hour for all warranty or recall work.
For all other work done by Service for retail customers and Used Car Sales, the deemed hours a Service
Technician works on a job is the lower of the job’s total book hours and the actual hours worked on the
job. Service Technicians are paid the deemed hours multiplied by $35 per hour plus 2% of the cost of the
parts used to complete the job. In addition, when actual hours worked is less than the total book hours,
Service Technicians are awarded bonus hours which are 80% of the difference between total book hours
and actual hours worked on the job. Bonus hours are multiplied by $35 to determine the Service
Technician’s bonus for the job.
For example, consider a job for which the total book hours is 4 and the cost of the parts used to complete
the job is $150. If the Service Technician required 4.5 hours to complete the job, the Service Technician
would be paid $143 (that is, 4 x $35 + 2% x $150). If the Service Technician completed this job in 3.75
hours the Service Technician would be paid $143 plus a bonus of $7 [that is, (4 – 3.75) x 80% x $35].
Additional EOC Exercises with Solutions
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On occasion, a customer will return with a complaint that the work done was unsatisfactory. The Master
Technicians deal directly with the customer to determine whether the complaint results from
unsatisfactory work by the Service Technician. If the Master Service Technician determines that the
complaint results from faulty work, the job is assigned to the Service Technician who did the work. The
Service Technician is given no credit for the time taken to resolve the complaint and there is no charge to
the customer for the rework.
If the Master Technician determines that the complaint results from something that the Service
Technician could not have reasonably identified and repaired, the Master Technician completes the job.
The job is then charged to the customer using the usual pricing formula.
Service’s contribution to Administration costs is determined by subtracting Service’s total costs from its
revenue. Then Service’s target income is subtracted from the actual contribution to determine the
Service Manager’s performance bonus. In addition to an annual salary and the performance bonus, the
Service Manager is allocated 25% of all the bonuses earned by the Service Technicians.
WMC randomly polls customers to determine a quality rating for the dealership. General Managers are
expected to identify and address the cause of poor quality ratings. WMC assesses a dealership penalty
that depends on the quality rating. For poor quality ratings related to Service, part or all the penalty is
assigned to the Service Manager. Continued poor quality ratings for Service usually results in the
manager’s termination.
Required
1. What are the pros and cons of the Service Technician’s compensation scheme?
2. What information might Service Technicians require to improve their performance?
3. What information might Service Managers require to improve their performance?
4. What information might the General Manager require to improve overall performance at Hatley
Motors?
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Management Accounting, 7th Edition
Solution
1.
Some Pros
Rewarded for efficient work
Required to remedy any unacceptable work
Not penalized for failure to identify complex issue
Customers allowed to reclaim replaced parts
Some Cons
Low reward may lack incentive effect
Book code may not reflect dealership attributes
2. The service technicians would benefit from either in house or offsite training sessions to introduce
them to new service bulletins. Training time should be scheduled by the service department
manager and funded with their share of the rewards earned by the service technicians.
3. The Service Managers would benefit from offsite training sessions to share knowledge and
information about existing or new approaches to improving service performance. Service Managers
who have a proven record of success should conduct these seminars. The Service Managers would
also benefit from a summary of hours worked, parts installed, and quality for each service job to
identify performance trends and opportunities for improvement. It would be useful if these
summaries are organized both by job type and service technician.
4. The General Manager would benefit from aggregate reports of the work done. These reports would
include the average time taken for each job with a comparison to the standard work hours allowed
for that job. This report could be organized to highlight only those jobs where there was a material
difference between the actual time and the standard time. The General Manager would benefit
from an income summary highlighting total revenue and costs. The General Manager would also
benefit from a quality report that summarizes the number of jobs that required rework, the cause of
the rework, and the cost to Hatley Motors of the rework.
Additional EOC Exercises with Solutions
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