Price and efficiency variances, problems in standard-setting, benchmarking. NorthWest Fashions manufactures shirts for retail chains. Jorge Rivera, the controller, is becoming increasingly disenchanted with NorthWest’s six-month-old standard costing system. The bud¬

geted amounts for both its direct materials and direct manufacturing labour are drawn from its standard costing system. The budgeted and actual amounts forJuly 2007 were Budgeted Actual Shirts manufactured 4,000 4,488 Direct materials cost $24,000 $24,235 Direct materials units used (rolls of cloth) 400 408 Direct manufacturing labour costs $21,600 $22,154 Direct manufacturing labour-hours 1,000 1,020 There was no beginning or ending inventory ofmaterials.

Rivera observes that in the past six months he has rarely seen an unfavourable variance of any magnitude. The standard costing system is based on a study of the operations conducted by an independent consultant. Rivera decides to play detective and makes some unobtrusive observations of the workforce at the plant. He notes that, even at their current output levels, the workers seem to have a lot of time to discuss baseball, sitcoms, and the local hot fishing spots.

At a recent industry conference on “Benchmarking and Competitiveness,” Mary Blanchard, the controller of Winston Fabrics, told Rivera that Winston had employed the same independent consultant to design a standard costing system. However, the company dis¬

missed him after two weeks, because Winston employees quickly became aware of the con¬

sultant observing their work.

At the industry conference, Rivera participated in seminars on “benchmarking for the fabric industry.” A consultant for the Benchmarking Clearing House showed how she could develop six-month benchmark reports on the estimated costs ofNorthWest’s major competi¬

tors. She indicated that she was already examining the estimated cost ofshirts manufactured by the four largest importers into Canada. These importers had taken much business from NorthWest in recent years. This information would soon be available by subscribing to the Benchmarking Clearing House monthly service.

Instructions Form groups of two or more students to complete the following requirements.

Required 1. Compute the price and efficiency variances of NorthWest Fashions for direct materials and direct manufacturing labour inJuly 2007.

2. Describe the types of actions the employees at Winston Fabrics may have taken to reduce the accuracy of the standards set by the independent consultant. Why would employees take those actions? Is this behaviour ethical?

3. Describe how NorthWest might use information from the Benchmarking Clearing House when computing the variances in requirement 1.

4. Discuss the pros and cons of NorthWest using the Benchmarking Clearing House infor¬

mation to increase its cost-competitiveness.