Establishment of Standards, Varience 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 soni, Edwerd, Luuk control of the business. By 2017, il was clear that the company's plants needed to gain belle curilrol over production costs to sley cornpelilive. Edward hired a consultenl lu installe slenderd cesting 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, 2017 The menulecturing process for polelo chips begins when the potatoes placed into a large vel in which they are automatically wasted. After washing, the poletes flow directly to ani autorrialic peeler. The peeled poletues ther pass by inspectors, who manually cut aut deep eyes or other blemishes. After inspection, the potatoes are automatically sliced and dropped into the coaking cil. The frying process is clasely 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 1-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 $0.16 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 potatacs at a cost of $0.245 per pound. Toch potata averages 4.25 ounces. Under efficient operating conditions, it takes four potatoes to produce one 16-ounce bag of plain chips. Although we label hags as containing 16 ounces, we actually place 16.3 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 $0.04 per ounce, and we use 3.3 ounces of oil per bag of chips. The cost of salt is so small that we add it to overhead. Bags cost $0.11 each and boxes s0.52 each. Our plant produces 8.8 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 Trying monitor Boxing 16,600 Machine operators 6,300 I'm not sure that we can achieve the level of efficiency advocated by the study. In my opinion, the plant is operating efficiently for the level of output indicated if the hours allowed are about 10% higher I'm not sure that we can achieve the level of efficiency advocated by the study. In my opinion, the plant is operating efficiently for the level of output indicated if the hours allowed are about 10% higher. The hourly labor rates agreed upon with the union are: Raw potato inspectors $15.20 Finished chip inspectors 10.30 Frying monitor 14.00 Boxing 11.00 Machine operators 13.00 Overhead is applied on the basis of direct labor dollars. We have found that variable overhead averages about 116% of our direct labor cost. Our fixed overhead is budgeted at $1,135,216 for the coming year. Required: 1. By using a standard costing system, Crunchy Chips can increase of its manufacturing inputs. By developing price and quantity standards for each input, management can compute for each input. Since a standard costing system provides more information, control is enhanced. For example, since managers have the most control over usage of inputs, knowing the usage variances provides specific information about where action is needed. Moreover, by breaking out price variances, which are not as controllable, performance evaluation is improved. 2. The engineering standards are ideal standards. The president's concern is probably reflecting doubt that the labor standards be achieved. If pressure is applied to workers to achieve perfection standards, the outcome is likely to be Workers may become and their performance as a consequence. Many firms elect to use currently attainable standards in lieu of ideal standards. The standard suggested by the president is a good starting point. If experience indicates that his standard is too loose, then the standard can be adjusted later on. 3. Forri a group with two or three other students. Develop standard cast sheet for Crunchy Chips' plein potato chips. Round all curripulations to lour decimal places. Crunchy Chips Standard Cost Sheet Direct materials Patatons Cooking oil Bags Baxes Direct labor: Potato inspection Chip inspection Frying monitor Baxing Machine operators Variable overhead Fixed overhead Direct materials Cost per box Cosl per bey 4. Suppose that the level of production was 8.8 million bags of potato chips for the year as planned. If 9.5 million pounds of potatoes were used, compute the materials usage variance for potatoes. Enter the amount as a positive number and select Favorable or Unfavorable. #