Question

Define quantity standards and price standards as used in the standard cost method

You are the executive responsible for overseeing the Burberry Women’s Sportswear and Accessories Department. Several events have transpired with the suppliers of raw materials that may adversely impact the supply chain. There has been severe weather in Peru, which is where some of the raw material comes from to manufacture apparel products. Fuel prices have risen in several countries where you obtain material for the synthetic fabrics. Several of the ranches where you purchase material for your leather goods have reduced the size of their herds.

1 Prepare a /recommendations/report on the impact of these events on the cost of raw materials as well as the operational and financial implications for the Woman’s Sportswear and Accessory Department.

2 You must also propose the best course of action in light of these events.

This might include maintaining existing sales prices and consequently operate with lower margins; pass the cost increases along to customers in the form of higher prices; lower the raw material costs; or consider alternative products. In order to formulate your response, you will want to carefully consider the problem, examine the pros and cons of each alternative under consideration, and document your recommendations using sound arguments that are well supported.

Answer 1

First Question:

Standard costing practices creation of a standard/budget cost at the beginning of the period and the comparing the variances of actual costs from budgeted costs. In simple words, standard costing involves evaluating the variance in what we expected the cost to be and what it actually turned out to be.

The total cost, whether standard or actual, is made up of two components quantity of material (hours in case of labor) and the price of the material. On the similar note, the variance can also be bifurcated into two parts quantity variance and price variance. That's why in order to calculate each of the variances separately standards are set in qty terms, price terms and absolute $$ terms.

Answer to part 1 - Operation as well as Financial Implications of the events

Operational Implications

• No doubt, the supply chain will be severely hampered and it will be harder for the company to occupy a product from the supplier.
• Less supply of raw material will turn into less production which will create stress on the companies revenues and sales.
• Present and future orders will be affected

Financial Implications

• The cost of raw materials will rise which will, in turn, increase the cost of production of goods. The rise in fuel prices will also add up to an increase in the cost of production.
• The increase in the cost of production will either eat out current margins of the company and reduce the profits or will force the company to increase their selling which will lead to fewer sales and revenues.
• All the events will also affect companies growth plans for the future and will hit the financial performance of the company.

Recommendation / Reports on the above events:

• The company should look forward to alternative sources of raw material acquisition from where raw material can be bought until the situation settles down. The acquisition of raw material for leather products can be easily substituted by countries from where herds are available in the right number.
• The increased cost of production accounting to increase in the prices of fuel should be part of the pricing of the product and need to be shifted to the customer.
• The company can even think of producing alternate products which will involve less raw material (which are in shortage) and help company to sustain.

Best course of action:

maintaining existing sales prices and consequently operate with lower margins - this will help the company to retain its present customer at an increased cost and reduced margins. However, this might not be a sustainable strategy for long terms with reduced margins it will be harder for the company to survive and thrive.

pass the cost increases along to customers in the form of higher prices - this seems to be the most appropriate and reasonable option being passing the right cost will reduce the burden on the company and will increase the price of the product in the market. However, this might have an adverse effect on the market of the product and will reduce the present customer base of the product.

consider alternative products - Company can also think of producing alternative products from the same raw material which will help the company to capture new markets and grow continuously. However, this might involve investments in terms of capital and time as new machinery and new labour has to be invested to produce new products.