Pella is one of the world’s largest manufacturers of wood windows and doors. In 1992, Pella entered the national retail market with its ProLine windows and doors, manufactured in Carroll, Iowa. Since then, Pella has introduced many new product lines with manufacturing facilities in several states. Suppose Pella has been using a standard cost system that bases price and quantity standards on Pella’s historical long- run average performance. Assume Pella should use some basis other than historical performance for setting standards.

Requirements

1. List the types of variances you recommend that Pella compute (for example, direct materials price variance for glass). For each variance, what specific standards would Pella need to develop? In addition to cost standards, do you recommend that Pella develop any ­nonfinancial standards? Explain.

2. There are many approaches to setting standards other than simply using long- run average historical prices and quantities.

a. List three alternative approaches that Pella could use to set standards and explain how Pella could implement each alternative.

b. Evaluate each alternative method of setting standards, including the pros and cons of each method.

c. Write a memo to Pella’s controller detailing your recommendations. First, should Pella retain its historical data- based standard cost approach? If not, which alternative ­approach should it adopt?