And Roy, you know as well as anyone else that while our sales volume is down, we've got to cut costs. Your department's unit costs are up 2% this June. We just can’t have any more of this or I'll have to find someone who can keep the costs down.”

Roy Lilley, a production department manager for the JJS Company, left the meeting room very upset. He had just been severely criticized by the production supervisor because of inefficiency in his department. The basis for that criticism was the following report:

DEPARTMENT 40-00 (ROY LILLEY)

COST REPORT: MAY AND JUNE May June Production (units) 20,000 16,000 Direct labor hours 4,000 3,100 Costs:

Direct materials $10,000 $ 8,400 Direct labor 30,000 22,000 Roy felt that something was wrong. It seemed to him that his department had worked harder than any of the others to keep costs down. This same episode occurred last summer too, and Roy had almost quit his job because of it.
The cost accounting system used by the JJS Company applies all costs incurred each month to the units produced. Actual total overhead costs, for example, are computed at the end of the month and assigned to the month’s production at an actual rate per direct labor hour. In May, total overhead costs had been $100,000 while 10,000 actual direct labor hours were worked in the factory. In June, overhead costs were $90,000 while direct labor hours had dropped to 8,000.
Required: Discuss how useful the cost report is in judging the performance of Roy Lilley’s department during June.Also discuss how a standard cost system could be used to prepare another performance report for Department 40-00, one that would be more useful to Roy Lilley and to the production supervisor.

 TKY-1