Jazz Manufacturing is a Philippine company that processes a wide range of natural resources. Two years ago, the company acquired Foreign Manufacturing, a raw material processing firm located in the United States. Over the last year, profits have fallen in the U.S.-based subsidiary. Jose Andres, the Manager of Manufacturing Accounting for Foreign Manufacturing, has been asked to identify the problems that have impaired the firms profits. She has reviewed the monthly production cost reports and discovered that the per unit costs have been consistently increasing over the last year. Since the subsidiary used an actual cost system, Jose convinced the president and the production manager that a thorough assessment of each products cost and the implementation of a standard cost system would help to solve the problem. Within six months, Jose installed a fully operational standard cost system for the division. After several months of using the new cost system, Jose is perplexed by unexplainable efficiency and yield variances, which result in material inventory write- downs at the end of each month. The work-in-process account is charged with the actual input costs of direct materials and direct labor, plus a predetermined rate for normal spoilage. At the end of the month, the work-in-process account is relieved by the standard cost per unit multiplied by the number of good units produced. This leaves a balance in the account which should be consistent with the uncompleted units still in process, but when compared to a physical inventory, there is a significant shortage of product in process, resulting in a write-down of inventory. When Jose explained her problems to the production manager, he scoffed and said, Its your crazy standard cost system that is messed up. The production manager says that Joses cost system is poorly designed and does not track product costs accurately. Jose is convinced there is nothing wrong with the design of the standard cost system. She knows that the inventory write-downs have no effect on the production managers compensation; however, she has heard that his bonus is partially affected by the actual amount of spoilage. She decides to further examine the provision for normal spoilage, as well as the actual spoilage reported. During the following month, she monitored the records of disposal truck traffic that left the plant at night. It would require only one truck nightly to dispose of the spoilage included in her standard cost. The records reflected an average of three disposal trucks leaving the plant each night. This unexplained traffic of disposal vehicles has caused her to be skeptical about the actual spoilage reported by the production manager.

REQUIRED:

What may explain the unusual inventory write-downs at Foreign Manufacturing considering the company is implementing a standard costing?(10 points)

What are the steps/strategies that Jose should take in order to resolve the situation? (10 points)