ADM 2341 Lecture 32: 1

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lilachippopotamus32

22 Apr 2018

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> ideal standards = represent optimum levels of performance under perfect operating conditions. > most managers believe that ideal standards lower the morale of the entire workforce be- cause they are so difficult, if not impossible, to meet. > normal standards = represent efficient levels of performance that are attainable under expected operating conditions. e. g, direct materials price standard = the cost per unit of direct materials that should be incurred. > this standard should be based on the purchasing department s best estimate of the cost of raw materials. > price standard should also include an amount for related costs, such as receiving, storing, and handling the mate- rial. direct materials quantity standard = the quantity of direct materials that should be used per unit of finished goods. > this standard is expressed as a physical measure, such as kilograms, barrels, or litres.

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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.

LOOKING FOR SOLUTION TO PART 2,3,4

Section I: Cost-Volume-Profit Analysis

The Hampshire Company manufactures umbrellas that sell for$12.50 each. In 2014, the company made and sold 60,000 umbrellas.The company had fixed manufacturing costs of $216,000. It also hadfixed costs for administration of $79,525. The per-unit costs ofeach umbrella are as follows:

Direct Materials: $3.00

Direct Labor: $1.50

Variable Manufacturing Overhead:$0.40

Variable Selling Expenses: $1.10

Using the information above, perform a cost-volume-profit (CVP)analysis by completing the steps below. All CVP calculations shouldbe completed in the Hampshire Company Spreadsheet. Note:The CVP analysis satisfies Part A of Section I.

Compute net income before tax.

Compute the unit contribution margin in dollars and thecontribution margin ratio for one umbrella.

Calculate the break-even point in units and dollars of revenue.Note: This is a required part of the CVP analysis andsatisfies Part C of Section I.

Calculate the margin of safety:

In units

In sales dollars

As a percentage

Calculate the degree of operating leverage.

Assume that sales will increase by 20% in 2015. Calculate thepercentage of before-tax income for this increase. Providecalculations to prove that your percentage increase is correctbased on the operating leverage calculated in step 5.

Compute the number of umbrellas that Hampshire is required tosell if it plans to earn $150,000 in income before taxes by usingthe target income formula. Proof your calculation.

A company that specializes in tours in England has offered topurchase 5,000 umbrellas at $11 each from Hampshire. The variableselling costs of these additional units will be $1.30 as opposed to$1.10 per unit. Also, this production activity will incur another$15,000 of fixed administrative costs. Should Hampshire agree tosell these additional 5,000 umbrellas to the touring business?Provide calculations to support your decision.

Additionally, complete Parts B and D of Section I as outlined inthe Final Project Guidelines and Rubric document.

Section II: Inventory Management

The information below represents the beginning and endinginventory amounts along with the production and sales for the monthin umbrella units.

Beginning Inventory: 0 Umbrellas

Production: 80,000 Umbrellas

Sales: 60,000 Umbrellas

Ending Inventory: 20,000Umbrellas

Using the information provided above and the costs and salesinformation provided in Section I, complete the following in theHampshire Company Spreadsheet in order to assist you in respondingto all components of Section II:

Prepare a variable costing income statement.

Prepare an absorption costing income statement.

Additionally, complete Parts A through E of Section II asoutlined in the Final Project Guidelines and Rubric document.

Section III: Benchmarking

The management of the Hampshire Company would like to implementbenchmarking. Standard costs have been established and arepresented below. You will want to complete a variance analysis toinclude efficiency and price variances for materials (cloth andhandle assemblies) and labor based on the following data:

Units Produced = 80,000

Units Sold = 60,000

Direct Materials Purchased and Used

Actual square yards of cloth purchased and used: 128,000

Actual price incurred per yard: $1.25

Actual handles purchased and used: 80,808

Actual price per handle/rib/stretcher assembly: $0.99

Direct Manufacturing Labor Used

Actual direct labor hours used: 15,748

Actual price per hour: $7.62

Direct labor costs: $120,000

Standard Rates

Standard labor hours per unit: 0.20

Standard labor price per hour: $7.50

Square yards material per unit: 1.50

Standard price per yard: $1.15

Handle/rib/stretcher assembly per unit: 1

Standard price per handle assembly: $1.05

Companies can use variance analysis and benchmarking to measureperformance within their own company and against competitors. Thiscan be done by setting standards/budgets and comparing a completedvariance analysis to results from prior periods or comparing themto competitorsâ results. Using the information provided above,complete the following calculations (steps 1 and 2) in theHampshire Company Spreadsheet. This will assist you in respondingto all components of Section III.

Calculate price variances for material and labor and denotewhether they are favorable or unfavorable.

Calculate efficiency variances for material and labor and denotewhether they are favorable or unfavorable.

In order to measure performance and make use of the varianceanalysis completed, management understands the need to compareresults with their competitors. Following the steps outlined below,you will research benchmarking and propose the most effectiveapproach for your company. Respond to Parts A through C of SectionIII as outlined in the Final Project Guidelines and Rubricdocument.

Section IV: Alternative Costing Method

Hampshire has always produced stick umbrellas. However, it isconsidering expanding its production to include collapsibleumbrellas. This consideration has been spurred by Tours Today, atouring company that is interested in providing its customers withcollapsible umbrellas imprinted with its logo. The management atHampshire is currently working out a deal with the touring companyto produce 3,000 collapsible umbrellas and believes it can sellthose umbrellas for $14.00 each. Here are the costs that can bedirectly traced to this special order:

Direct Materials: $9,300

Direct Labor Hours: 600

Hourly Rate of Direct labor:$8.00

In the traditional costing approach, overhead is applied at therate of $24.60 per labor hour. This expansion in production willadd additional overhead costs. The total overhead costs (assumingproduction of the stick and collapsible umbrellas) to include thecost pools and cost drivers are provided in Table 2.

An alternative costing method that might benefit Hampshire isthe implementation of activity-based costing (ABC).Hampshire would like to implement an ABC approach to analyze theproduction of this special order of collapsible umbrellas. Thecontroller has assembled the following information:

	Stick	Collapsible
Units Sold	60,000	3,000
Selling Price	$12.50	$14.00
Direct Material Cost per Unit	$3	$3.10
Direct Labor Cost per Hour	$7.50	$8.00
Variable Manufacturing Overhead	$0.40	$0.40
Variable Selling Costs	$1.10	$1.10
Labor Hours per Unit	0.2	0.2
Sales Orders	120	1
Purchase Orders	50	3
Production Runs	45	6
Material Moves	86	10
Machine Setups	130	6
Machine Hours	525	32
Inspections	200	10
Shipments	60	3

Table 1: Direct Cost Information and Activities

Activity	Activity Cost	Activity Cost Driver
Order Processing	$35,000	Number of Sales Orders
Purchasing	$36,000	Number of Purchase Orders
Material Handing	$28,000	Material Moves
Machine Setup	$14,000	Machine Setups
Production	$99,000	Production Runs
Assembly	$80,000	Machine Hours
Inspecting	$11,000	Number of Inspections
Shipping	$7,500	Number of Shipments

Table 2: Activity Cost Pools and Cost Drivers

Another alternative to traditional costing and ABC istime-driven activity-based costing (TDABC). You will need todetermine which of these three methods would be the best approachfor the Hampshire Company. The following article may assist you inyour analysis: Time-Driven Activity-Based Costing. Additionally,you may want to use the Shapiro Library to conduct further researchon the three methods. You will need to defend your position whenanswering the prompts for the written portion of this section.

Using the information provided above, complete the following inthe Hampshire Company Spreadsheet in order to assist you inresponding to all components of Section IV:

1.Calculate the allocation rates foreach cost driver using ABC.

2.Use the traditional costing approachto calculate the total cost and the unit cost of the stick andcollapsible umbrellas.

3.Use ABC to compute the total costsand the unit cost for the stick and collapsible umbrellas.

4.Compute the difference between theproduct cost per stick and collapsible umbrellas using the unitcost that you computed with the traditional approach and the onethat you computed using ABC.

Based on your calculations from steps 1â4, respond to Parts Athrough C in Section IV as outlined in the Final Project Guidelinesand Rubric document.

Section V: Memo to Management

The management of the Hampshire Company is very interested inmeasuring performance. They would like you to recommend a strategyto increase business performance. They are not sure whether theyshould focus on product differentiation or cost leadership.Research additional performance tools to include the balancedscorecard. During your research, consider what performancemeasurements you would use based on the four perspectives. Provideexamples.

In your recommendation, you will want to include the outcome ofyour previous quantitative analysis and research performed relatedto cost-volume-profit (CVP), variable and absorption costing,just-in-time (JIT), standard costs, variances, and benchmarking.You will want to review key points and make recommendations basedon your current research and prior analysis completed and researchperformed.

Your two- to three-page memo to management must be submitted asa Word document and must include your responses to Parts A throughC of Section V as outlined in the Final Project Guidelines andRubric document.

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ADM 2341 Lecture 32: 1

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