Case $10-49$ Establishment of Standards, Variance Analysis

Paul Golding and his wife, Nancy, established Crunchy Chips in $1938.$ Over the past $60$ years,

the company has established distribution channels in $11$ western states, with production facilities

in Utah, New Mexico, and Colorado. In $1980,$ Paul$$s son, Edward, took control of the business.

By $2011,$ it was clear that the company$$s plants needed to gain better control over production

costs to stay competitive. Edward hired a consultant to install a standard costing system. To help

the consultant establish the necessary standards, Edward sent her the following memo:

To: Diana Craig, Certified Management Accountant

From: Edward Golding, President, Crunchy Chips

Subject: Description and Data Relating to the Production of Our Plain Potato Chips

Date: September $28,2011$

The manufacturing process for potato chips begins when the potatoes are placed into a large

vat in which they are automatically washed. After washing, the potatoes flow directly to an automatic

peeler. The peeled potatoes then pass by inspectors, who manually cut out deep eyes or

other blemishes. After inspection, the potatoes are automatically sliced and are dropped into

the cooking oil. The frying process is closely monitored by an employee. After the chips are

cooked, they pass under a salting device and then pass by more inspectors, who sort out the

unacceptable finished chips $($those that are discolored or too small$).$ The chips then continue on

the conveyor belt to a bagging machine that bags them in one$-$pound bags. After bagging, the

bags are placed in a box and shipped. The box holds $15$ bags.

The raw potato pieces $($eyes and blemishes$),$ peelings, and rejected finished chips are sold

to animal feed producers for $$0\mathrm{.}16$ per pound. The company uses this revenue to reduce the

cost of potatoes; we would like this reflected in the price standard relating to potatoes.

Crunchy Chips purchases high$-$quality potatoes at a cost of $$0\mathrm{.}245$ per pound. Each potato

averages $4\mathrm{.}25$ ounces. Under efficient operating conditions, it takes four potatoes to produce

one $16-$ounce bag of plain chips. Although we label bags as containing $16$ ounces, we actually

place $16\mathrm{.}3$ ounces in each bag. We plan to continue this policy to ensure customer satisfaction.

In addition to potatoes, other raw materials are the cooking oil, salt, bags, and boxes. Cooking

oil costs $$0\mathrm{.}04$ per ounce, and we use $3\mathrm{.}3$ ounces of oil per bag of chips. The cost of salt is so

small that we add it to overhead. Bags cost $$0\mathrm{.}11$ each and boxes $$0\mathrm{.}52$ each.

Our plant produces $8\mathrm{.}8$ million bags of chips per year. A recent engineering study revealed

that we would need the following direct labor hours to produce this quantity if our plant operates

at peak efficiency:

Raw potato inspection $3,200$

Finished chip inspection $12,000$

Frying monitor $6,300$

Boxing $16,600$

Machine operators $6,300$