Kevin and his wife, Natalie, established Crunchy Chips in $1963.$ Over the past $60$ years, the company has established distribution channels in $13$ states, with production facilities in Utah, New Mexico, and Colorado. In $2000,$ Kevin$$s daughter, Karen, took control of the business. By $2013,$ it was clear that the company$$s plants needed to gain better control over production costs to stay

competitive. Karen hired a consultant to install a standard costing system. To help the consultant establish the necessary standards, Karen 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 $28,2013$

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 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 fnished 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 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 $6,300$

I am 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:

$($All figures in $$)$

Raw potato inspectors $15\mathrm{.}20$

Finished chip inspectors $10\mathrm{.}30$

Frying monitor $14\mathrm{.}00$

Boxing $11\mathrm{.}00$

Machine operators $13\mathrm{.}00$

Overhead is applied based on 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:

a$)$ Discuss the benefits of a standard costing system for Crunchy Chips. $(5$ marks$)$

b$)$ Discuss the president$$s concern about using the result of the engineering study to set the

labor standards. Which standard would you recommend?