ACCT 2230 Chapter Notes - Chapter 10: Unemployment Benefits

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26 Nov 2014

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Management by exception: a system of management in which standards are set for various operating activities that are then periodically compared to actual results. Any differences that are deemed significant are brought to the attention of management as exceptions . Standard cost record: a detailed listing of the standard amount of materials, labour, and overhead that should go into a unit of product, multiplied by the standard price or rate that has been set for each cost element. Ideal standards: standards that allow for no machine breakdowns or other work interruptions and that require peak efficiency at all times. Practical standards: standards that allow for normal machine downtime and other work interruptions and can be attained through reasonable, although highly efficient, efforts by the average employees. Standard price per unit: the price that should be paid for a single unit of materials, including shipping, receiving, and other such costs, net of any discounts allowed.

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Hickory Furniture Company manufactures unfinished oak furniture.Hickory uses a A detailed estimate of what a product shouldcost.standard cost system. The direct labor, direct materials, andfactory overhead Performance goals, often relating to how much aproduct should cost.standards for an unfinished dining room tableare as follows:

Direct labor:	standard rate	$21 per hr.
	standard time per unit	3 hrs.
Direct materials (oak):	standard price	$10 per bd. ft.
	standard quantity	20 bd. ft.
Variable factory overhead:	standard rate	$2.4 per direct labor hr.
Fixed factory overhead:	standard rate	$0.8 per direct labor hr.

a. Determine the standard cost per dining roomtable. If required, round your answer to two decimal places.
$per table

b. A Accounting systems that use standards foreach element of manufacturing cost entering into the finishedproduct.standard cost system provides Hickory Furniture managementa cost control tool using the principle of management byexception

cost control

management by exception

. Using this principle, major < >majorminor costdeviations from standards can be investigated and corrected.

Merit Inc. has used a standard cost system for evaluating theperformance of its responsibility center managers for 3 years. Topmanagement believes that standard costing has not produced the costsavings or increases in productivity and profits promised by theaccounting department. Large unfavorable variances are consistentlyreported for most cost categories, and employee morale has fallensince the system was installed. To help pinpoint the problem withthe system, top management asked for separate evaluations of thesystem by the plant manager, that controller, and the humanresources director. Their responses are summarized here. Plantmanager - The standards are unrealistic. They assume an ideal workenvironment that does not allow materials defects or errors by theworkers or machines. Consequently, morale has gone down andproductivity has declined. Standards should be based on expectedannual prices and recent past averages for efficiency. Thus, if weimprove over the past, we receive a favourable variance. Controller- The goal of accounting reports is to measure performance againstan absolute standard and the best approximation of that standard isideal conditions. Cost standards should be comparable to "par" on agolf course. Just as the game of golf uses a handicap system toallow for differences in individual players' skills and scores, itcould be necessary for management to interpret variances based onthe circumstances that produced the variances. Accordingly, in onecase, a given unfavorable variance could represent poorperformance; in another case, it could represent good performance.The managers are just going to have to recognize these subtletiesin standard cost systems and depend on upper management to be fair.Human resources director - The key to employee productivity isemployee satisfaction and a sense of accomplishment. A set ofstandards that can never be met denies managers of this vitalmotivator. The current standards would be appropriate in alaboratory with a controlled environment but not in the factorywith its many variables. If we are to recapture our old "teamspirit," we must give the managers a goal that they can achievethrough hard work.

Required: Discuess the behavioral issues involved in MeritInc.'s standard cost dilemma. Evaluate eavh of the three responses(pros and cons) and recommend a course of action.

Bramlett Company has several divisions and just built a newplant with a capacity of 20,000 units of a new product. A standardcosting system has been introduced to aid in evaluating managers'performance and for establishing a selling price for the newproduct. At the present time, Bramlett faces no competitors in thisproduct market, and managers priced it at standard variable andfixed manufacturing cost, plus 60% mark-up. Managers hope thisprice will be maintained for several years.

During the first year of operations, 1,000 units per month willbe produced. During the second year, production is estimated to be1,500 units per month. In the first month of operations, employeeswere learning the processes, so direct labour hours were estimatedto be 20% greater than the standard hours allowed per unit. Insubsequent months, employees were expected to meet the directlabour hours standards.

Experience in other plants and with similar products ledmanagers to believe that variable manufacturing costs would vary inproportion to actual direct labour dollars. For the first severalyears, only one product will be manufactured in the new plant.Fixed overhead costs of the new plant per year are expected to be$1,920,000, incurred evenly throughout the year.

The standard variable manufacturing cost (after the break-inperiod) per unit of product has been set as follows:

Direct materials (4 pieces @ $20 per piece) $ 80
Direct labour (10 hours @ $25 per hour) 250
Variable overhead (50% of direct labour cost) 125
Total $455

At the end of the first month of operations, the actual costsincurred to make 950 units of product were as follows:

Direct materials (3,850 pieces @ $19.80) $ 76,230
Direct labour (12,000 hours @ $26) 312,000
Variable overhead 160,250
Fixed overhead 172,220

Bramlett managers want to compare actual costs to standard toanalyze and investigate variances and take any correctiveaction.

REQUIRED
A. What selling price should Bramlett set for the new productaccording to the new pricing policy? Explain.
B. Using long-term standard costs, compute all direct labour andmanufacturing overhead variances.
C. Is it reasonable to use long-term standard costs to calculatevariances for the first month of operations? Why or why not?
D. Revise the variance calculations in Part B, using the expectedcosts during the first month of operations as the standardcosts.
E. Provide at least two possible explanations for each of thefollowing variances:
1. Direct labour price variance
2. Direct labour efficiency variance
3. Variable overhead spendingvariance
4. Fixed overhead spending variance

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ACCT 2230 Chapter Notes - Chapter 10: Unemployment Benefits

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