Question

Scenario:  Cabinets, Inc., is a large manufacturer of modular kitchen cabinets, sold primarily to builders and developers. The company uses a standard cost system. Standard production costs have been developed for each type of cabinet; these costs and any cost variances are charged to the production department. A budget also has been developed for the sales department. The sales department is credited with the gross profit on sales (measured at standard cost) and is charged with selling expenses and any variations between budgeted and actual selling expenses.

In early April, the manager of the sales department asked the production department to fill a rush order of kitchen cabinets for a tract of 120 homes. The sales manager stated that the entire order must be completed by May 31. The manager of the production department argued that an order of this size would take 12 weeks to produce. The sales manager answered, “The customer needs it on May 31, or we don’t get the business. Do you want to be responsible for our losing a customer who makes orders of this size?”

Of course, the production manager did not want to take that responsibility. Therefore, he gave in and processed the rush order by having production personnel work overtime through April and May. As a result of the overtime, the performance reports for the production department in those months showed large, unfavorable labor rate variances. The production manager, who in the past had prided himself on coming in under budget, now has very ill feelings toward the sales manager. He also has stated that the production department will never again accept a rush order.

(MUST POST FIRST) Initial Post – As an employee, write an internal memo to your manager addressing the following:

Identify any problem that you see in the company’s standard cost system or in the manner in which cost variances are assigned to the responsible managers.

Make recommendations for changing the cost accounting system to reduce or eliminate any problems that you have identified.

For your response post, you will be taking on the role of the manager and respond to your employee’s memo. Inform the employee as to what specific managerial decisions, conclusions, and/or judgments can you make from the information provided in that memo. Do not respond to a memo that has already received a managerial response.

Answer 1

Solution:

The standard costing analysis helps to understand the performance of the production department as well production manager. It is one of the most important cost analysis tools which must be utilized properly at the time of making any decision regarding production process and cost analysis. The standard costing analysis the cost variance by comparing the standard cost and the actual cost. There are various types of variances like material variance, labor variances and overhead variances. The all the variances are divided into two parts i.e. usage and price variance. The details analysis of the same helps to find out the lack of the production department.

In the given case the production of high demand within short time makes negative impact on the labor efficiency variances also the overhead payment to the labor makes impact on the labor rate variances and both these variance is unfavorable and it also makes impact on the performance of the production manager. The overtime labor hours reduce the efficiency of the labor. The cost variances are become negative and the cost behavior also shows negative results of the cost performance. The same should be controlled by proper planning of the production department. The budgeted or standard labor hours should be prepared according with the resources and their availability. It will help to make a reasonable standard costing analysis and the actual cost behavior will measure through this.

References:

Babaliaros, V., Devireddy, C., Lerakis, S., Leonardi, R., Iturra, S. A., Mavromatis, K., ... & Simone, A. (2014). Comparison of transfemoral transcatheter aortic valve replacement performed in the catheterization laboratory (minimalist approach) versus hybrid operating room (standard approach): outcomes and cost analysis. JACC: Cardiovascular Interventions, 7(8), 898-904.

Dale, B. G., & Plunkett, J. J. (2017). Quality costing. Routledge.