Kim's Costumes had its origin in New Jersey when a group of

local residents decided to form a group for the purposes of

creating custom Halloween costumes for the children.

Although the initial motivation for getting the group together

was social in nature, they soon discovered that many of the

members were unusually talented and creative. Consequently,

it was not long before they were producing handmade items

that were placed on consignment for sale at several of the local

retail shops. After three years of continued increases in market

demand, several of the more entrepreneurial members decided

to investigate the feasibility of starting their own company.

When a small but well-maintained manufacturing facility

located in a nearby town was advertised for sale, the group of

entrepreneurs, along with Kim Rubin, the former plant

manager, decided to start their own small business and

purchase the manufacturing plant. Under Kim's leadership, the

group developed an initial business plan that called for the new

company to focus on producing and selling costumes for

various occasions.

Based on their experience with the items that were made and sold

by the initial group, decided that their initial product would be a

brightly colored super hero costume that would be marketed for

children under the age of 5, and that could be customized to

different market segments to accommodate a variety of customer

interests and specifications. Steve Markoff, the company's Chief

Financial Officer, who had been hired to assist with the financial

arrangements of the business start-up, decided to adopt a standard

costing system as part of the company's comprehensive planning

and control system. In accordance with this, he determined the

standard cost of the company's blanket to be $74 broken down as

follows:

Direct Materials ( 6 square yards at $ 8.00 per square

Direct Labor ( 1/2 hour at $16.00 per hour

Manufacturing overhead $18.00 per unit

$74.00

Although the company's longer term monthly volume was expected to be approximately

24,000 uniforms, the CFO decided to establish the initial standard manufacturing cost per

unit based on the more conservative and realistic assumption that the normal monthly

production would be 18,000 uniforms during the company's first year of operation. The

projected normal monthly production volume was based on an average monthly sales

forecast of 18,000 units, as they had determined that, during the company's start-up

period, it would not have sufficient cash to allow it to maintain very much finished goods

inventory. They did not believe this would be a problem however, due to the very short

production time for the costumes. Thus, they felt it was reasonable to expect monthly

sales and production to be approximately the same and therefore, the expected both

work-in-process and finished-goods inventory to be negligible.

Due to the importance of the high quality of the raw material

used to make the costumes, they did anticipate the need to

maintain some minimum level of raw materials inventory.

During the first several months of business, the company's

actual results were very similar to the company's forecast. The

selling price of $100 per blanket had been set by the company's

product manager Claudia after considerable and careful market

analysis. This pricing seemed appropriate and monthly sales

and production had been pretty much as expected. Although

she was delighted at the company's early success, Claudia was

always looking for opportunities to grow the business and

improve its profitability.

In mid-April of the first year, she became aware of a new

supplier that sole a unique, high-quality fabric.

The only problem was that the new material was slightly more

expensive than the material the company was presently using,

and Claudia did not believe the company would be able to raise

it's $100 selling price.

Nevertheless, she decided to switch suppliers and began using

the new material for the May production. So, she placed her

initial order for the new material to be received at the end of

April. By then, she expected there would be little, if any,

existing raw material remaining in inventory. Although she was

confident she had made the right decision, she would just have

to wait and see.

As it turned out, the following actually occurred during the

Month of May:

1.

As ordered, 220,000 square yards of the new blanket

material at a price of $8.25 per square yard were received.

2.

The company produced and sold 20,000 costumes at a price

of $100 per blanket

3.

The company used 110,000 square yards of material and

incurred 9,000 direct labor hours at an average cost of

$16.90 per hour. The higher average per-hour labor cost

was due to bonuses paid to workers for exceeding normal

production volumes.

4.

The company's monthly budgeted manufacturing overhead

was $324,000, or $18 per blanket, at normal production

volume. Of this amount, $171,000 was considered to be

fixed and the remainder was expected to vary with

production volume.

5.

The company's actual manufacturing overhead for the

month was $330,000, of which $170,000 was fixed.

REQUIRED

:

Although it is not required that you present your case in any particular order, a

"free flowing discussion form" is perfectly fine, the following items are required

to be presented for full credit:

1.

What factors might have contributed to the CFO's decision to adopt a

standard costing system?

2.

What business reasons that may have led the company's product manager to

change to the new and more expensive blanket material?

3.

Assuming that the company computes its direct materials variances at the

time of purchase, determine the price and usage variances.

4.

Determine the direct labor rate and efficiency variances.

5.

Assuming the company wishes to utilize a 2-way overhead analysis scheme,

determine the manufacturing overhead variances for May.

6.

Based on your analysis and the information pertaining to the company's

operations for May, does the purchasing decision made by the company's

product manager appear to be a good one? EXPLAIN FULLY your reasoning.

Discuss any other factors that might be important.

Super Duper Double Secret Bonus

:

What if the CFO decided that they needed more in-depth variance

information and specifically, wished to have a 4-way overhead analysis.

Compute these variances and interpret them in connection with the facts

given in the case