Question

Paul Lewin and his wife, Patti, established Crispy Chips in 1958. Over the past 40 years, the company has established distribution channels in 10 western states, with production facilities in Colorado, California, and Arizona. In 1980, Paul’s son, Scott, took control of the business. By 2016, it was clear that the company’s plants needed to gain better control over production costs to stay competitive. Scott hired a consultant to install a standard costing system. To help the consultant establish the necessary standards, Scott sent him the following memo:

To:                  Mark Robins, Certified Management Accountant

From:              Scott Lewin, President, Crispy Chips

Subject:           Description and Data Relating to the Production of Our Plain Potato Chips

Date:               August 28, 2016

The manufacturing process for potato chips begins when the potatoes are placed into a large vat in which they are automatically washed. After washing, the potatoes flow directly to an automatic peeler. The peeled potatoes then pass by inspectors, who manually cut out deep eyes or other blemishes. After inspection, the potatoes are automatically sliced and are dropped into the cooking oil. The frying process is closely monitored by an employee. After the chips are cooked, they pass under a salting device and then pass by more inspectors, who sort out the unacceptable finished chips (those that are discolored or too small). The chips then continue on the conveyor belt to a bagging machine that bags them in one-pound bags. After bagging, the bags are placed in a box and shipped. The box holds 15 bags.

The raw potato pieces (eyes and blemishes), peelings, and rejected finished chips are sold to animal feed producers for $0.16 per pound. The company uses this revenue to reduce the cost of potatoes; we would like this reflected in the price standard relating to potatoes.

Crispy Chips purchases high-quality potatoes at a cost of $0.245 per pound. Each potato averages 4.25 ounces. Under efficient operating conditions, it takes four potatoes to produce one 16-ounce bag of plain chips. Although we label the bags as containing 16 ounces, we actually place 16.3 ounces in each bag. We plan to continue this policy to ensure customer satisfaction. In addition to potatoes, other raw materials are the cooking oil, salt, bags, and boxes. Cooking oil costs $0.04 per ounce, and we use 3.3 ounces of oil per bag of chips. The cost of salt is so small that we add it to overhead. Bags cost $0.11 each and boxes $0.52 each.

Our plant produces 8.8 million bags of chips per year. A recent engineering study revealed that we would need the following direct labor hours to produce this quantity if our plant operates at peak efficiency:

                        Raw potato inspection                                     3,200

                        Finished chip inspection                               12,000

                        Frying monitor                                                6,300

                        Boxing                                                          16,600

                        Machine operators                                          6,300

I’m not sure that we can achieve the level of efficiency advocated by the study. In my opinion, the plant is operating efficiently for the level of output indicated if the hours allowed are about 10% higher.

The hourly labor rates agreed upon with the union are:

                        Raw potato inspectors                                     $15.20

                        Finished chip inspectors                                 10.30

                        Frying monitor                                                14.00

                        Boxing                                                             11.00

                        Machine operators                                          13.00

Overhead is applied on the basis of direct labor dollars. We have found that variable overhead averages about 116% of our direct labor cost. Our fixed overhead is budgeted at $1,135,216 for the coming year.

QUESTION:

A.Develop a standard cost sheet for Crispy Chips plain potato chips. Round all computations to four decimal places.

B. Suppose that the level of production was 8.8 million bags of potato chips for the year as planned. If 9.5 million pounds of potatoes were used, compute the materials usage variance for potatoes.

C. Discuss the benefits of a standard costing system for Crispy Chips.

D. Discuss the president’s concern about using the result of the engineering study to set the labor standards. What standard would you recommend?  

Answer 1

(A)
Crispy Chips
Standard Cost Sheet
Element of Cost	Qty/ounce	Rate	Cost Per Bag
Direct Material
Raw Potato	=4.25*4	0.245	4.2431
Cooking Oil	3.3	0.04	0.1345
Bags	1	0.11	0.1121
Boxes	=1/15	0.52	0.0353
		Total Direct Material		4.525
Less: Normal Loss
Direct Labour
Raw Potato Inspection	=3200/8800000	15.2	0.0056
Finished chips inspection	=12000/8800000	10.3	0.0143
Frying Monitoring	=6300/8800000	14	0.0102
Boxing	=16600/8800000	11	0.0211
Machine operators	=6300/8800000	13	0.0095
		Total Direct Labour		0.0607
Factory Overhead
Variable	116% of Direct Labour	=D19*116%	0.0704
Fixed		0.129001818	0.129
		Total Factory Overhead		0.1994
Less: Scrap Value				-0.16
		Cost Per Bag of Chips		4.6251
(B) Material Uses Variance=( Standard Material for Actual output-Actual Quantity )* standard rate of material
Standard Potatoes to be used for 8.8 Million Bags
Potatoes req per Bag	17 ounce
Potato cost per Pound	0.245
Total Standard Quantity required for 8.8M bags	=8800000*17 ounce/16	9350000 Pound
Actual Qantity used for 8.8M Bags		9500000 Pounds
Material usage Variance	=(9350000-9500000)*0.245	-36750	Adverse