Aero Gear, Inc.: Performance Measurement, Cost Management and Product Costing in a Lean Transition

Abstract

Aero Gear, Inc. was undergoing a transition to lean business practices to improve its competitive position. Its accounting and reporting system had not changed in tandem with the changes taking place on the shop floor and its managers no longer trusted the measures they used to monitor productivity and product profitability. They were seeking measures that would help their employees improve operations as well as measures they could use to set goals, to motivate their employees, and to monitor the impact of ongoing improvement efforts. In this case, students are challenged to present alternative performance measurement systems that are consistent with lean business practices and a continuous improvement culture.

This case was prepared for inclusion in SAGE Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2023 Sage Publications, Inc. All Rights Reserved

You are not authorized to view Teaching Notes. Please contact your librarian for access or sign in to your existing instructor profile.

Resources

Exhibit 1: Sample Products

Figure

Exhibit 2: The Bohica Flow Line

(Showing the path of a representative product)

Figure

Exhibit 3: Aero Gear Inc. Department Performance Report (Mm/dd/year – Mm/dd/year)

Emp.#

Name

Date

Shift

Code

Dept.

AG#

Job#

Run#

Operation

Pieces

Hours

Actual Pcs/Hr

Est. Pcs/Hr

D.L. Factor

Budget Rate

Actual Rate

Dollars Earned

Efficiency Percentage

1234

Smith

mdy

2

24

2271

121

22

120

10

5.10

1.96

1.41

1.38

75.90

105.55

538.31

139.1%

1234

Smith

mdy

2

SU

24

2271

121

22

120

0

5.20

4.46

1.38

75.90

65.12

338.62

85.8%

1234

Smith

mdy

2

24

2271

121

22

120

15

8.60

1.74

1.41

1.38

75.90

93.89

807.45

123.7%

*Employee totals

18.90

84.64

1,684.38

117.4%

**Shift totals

184.00

80.91

14,886.94

88.0%

***Department totals

539.40

84.28

45,461.46

90.4%

D . L .   F a c t o r   = S a l e s P r i c e - M a t e r i a l C o s t - O u t s i d e T o o l i n g - O u t s i d e P r o c e s s i n g ( E s t i m a t e d d i r e c t l a b o r h o u r s * ) x 5 5

*(Inside tooling hours + Setup hours + Processing hours)

For example, suppose a job had the following information:

Selling price

$11,080

Material cost

$ 4,000

Outside tooling

$ 800

Outside processing

$ 1,000

Estimated inside tooling hours

16

Estimated setup hours

4

Estimated processing hours

40

The D.L. factor for the job would be 1.6, as shown below:

D . L .   F a c t o r   = 1 1 , 0 8 0 - 4 , 0 0 0 - 8 0 0 - 1 , 0 0 0 ( 1 6 + 4 + 4 0 ) x 5 5

The budgeted rate for dollars earned per direct labor hour on the job would be $88.00 (11,080 – 4,000 – 800 – 1,000/(16 + 4 + 40), or $55 times the D.L. factor.

A worker completing a setup for this job in 24 minutes that was estimated to take 30 minutes would have an efficiency percentage of 125%, and an actual rate for dollars earned of $110.00 (125% of $88.00) per hour.

A worker completing 9 parts per hour for this job in a process that was estimated to complete 10 parts per hour would have an efficiency percentage of 90%, and an actual rate for dollars earned of $79.20 (90% of $88.00) per hour.

Exhibit 4: Aero Gear, Inc. Summary Hours Report

Week 1

Week 2

Week 3

… Week 12

Area Employee

Type

mdy – mdy

mdy – mdy

mdy – mdy

mdy – mdy

Total

Blue Jones

Dir. Labor

45

50

57

33

429

1235 Setup

9 (20%)

10 (20%)

12 (20%)

9 (27%)

97 (23%)

1235 Indirect

12 (21%)

12 (20%)

6 (10%)

20 (38%)

221 (34%)

1235 Total

56

61

63

53

650

1235 Eff. %

50.20%

124.60%

143.60%

101.50%

95.10%

Area Direct hours

719

705

727

571

7,472

Area Setup hours

185 (26%)

119 (17%)

117 (16%)

118 (21%)

1,673 (22%)

Area Indirect hours

236 (25%)

269 (28%)

258 (26%)

332 (37%)

3,908 (34%)

Area Total hours

956

974

985

902

11,381

Area Efficiency %

68.60%

86.40%

94.90%

141.40%

91.80%

Company Direct hours

1,707

1,657

1,775

1,282

17,915

Company Setup hours

326 (19%)

264 (16%)

281 (16%)

225 (18%)

3,250

Company Indirect hours

1,103 (39%)

1,136 (41%)

1,106 (38%)

1,390 (52%)

3,908 (18%)

Company Total hours

2,809

2,794

2,881

2,672

15,207 (46%)

Company Efficiency %

79.90%

96.50%

103.10%

142.90%

89.20%

Exhibit 5: Aero Gear’s Performance Measurement Charts*

Figure

*Data are for the months January 2000 – August 2001. Y axis labels have been removed from the Sales and Total Sales per Employee Charts, and altered on the Inventory Turns Chart at the request of Aero Gear’s management.

This case was prepared for inclusion in SAGE Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2023 Sage Publications, Inc. All Rights Reserved

locked icon

Sign in to access this content

Get a 30 day FREE TRIAL

  • Watch videos from a variety of sources bringing classroom topics to life
  • Read modern, diverse business cases
  • Explore hundreds of books and reference titles