Atcom is an international firm that specializes in the manufacture of telecommunication equipment. It was the manufacturing subsidiary and major supplier to a provincial telephone utility. With its early success, Atcom started to sell to customers other than its parent. Then, as part of a privatization policy, the provincial government issued 40 percent of Atcom's common shares to the citizens of the province.

Subsequently, Atcom expanded to a national and, more recently, an international (with one plant in the United States) sales and manufacturing organization. Two years ago, under pressure from customers and potential customers, the parent sold all but 10 percent of its shares. That divestment became part of a strategic plan that emphasized an increased level of new product introduction, especially with respect to computer and electronic technologies.

Within the last year, this accelerated introduction of new products has led to problems with the firm's standard cost system. To explain these problems, it is necessary to understand the various controls that are in place at Atcom. Atcom adopted its parent's control system, with few changes. Thus, Atcom updates its long-range (10-year) plan every two years. Quarterly updates supplement the annual budget and monthly reports against the original budget. Plans and budgets emphasize accountability, and they are done at all levels designated as profit, revenue, or cost centres. The management information systems (MIS) department prepares reports on non-financial information, e.g., capacity utilization, product quality, customer satisfaction. Sales forecasts are the basis of the budgets, and standards are the basis for production costs.

With this overlay of planning, budgeting, and management information systems, every unit of the organization is subject to standard operating activities, an inheritance from the utility parent. Documented activities specify exactly how employees are to undertake their responsibilities. With each unit an experienced staff (who reports to the president) develops the standards. The detailed operating activities specify the steps that employees must perform, the parts and materials to be used, etc. In this way, operating activities provide the basis for evaluating employee performance.

The problem with the standard costs is a result of the rapid rate of new product introduction. The eventually established operating activities are often different and inconsistent with costs committed for new products. Consequently, standard costs may be impossible to meet, or they could be insufficiently demanding. Employees are uncertain about the reasonableness of committed costs, and often there is lack of motivation to achieve perceived unfair standards.

The president hired you to provide advice on how to resolve the standard cost problem and to get commitment to the budgets and timetable for new products. Within the first few days, you realize that there are two opinions. Among the manufacturing employees, particularly the supervisors, the consensus is that they want to develop detailed activities (i.e., standard operating procedures) before committing to standard costs. They recognize and welcome the expectation that there will be a learning curve and lower unit costs as production volume increase. However, they insist upon a factual starting point consisting of activities by accountable employees.

The other consensus comes from the marketing employees. They say the production cost standards cannot wait for the detailed activities that determine the standard costs. They admit to the thoroughness and reduced risk from activities-based standard costs. They insist, however, that taking the time to establish the detailed activities will delay the introduction schedule for each new product by between six months and one year, and delay has already caused problems for them.

To resolve the conflict they suggest that standard costs should be determined by expected results, from which several different sets of activities could then be selected. Some marketing people are even questioning the need for standard costs. They cite, as evidence in favour of eliminating standard costs, just-in-time inventory systems, the large proportion of purchased components, and the declining share of costs going to direct labour.

Required:

The president has asked you to implement a solution for introducing new products without delay or lack of control. Using the case analysis framework as discussed in-class, report your findings