Kims 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. 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 Kims 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. The companys Chief Financial Officer decided to adopt a standard costing system as part of the companys comprehensive planning and control system. In accordance with this, he determined the standard cost of the companys blanket to be $74 broken down as follows:

Although the companys 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 companys 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 companys 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 companys actual results were very similar to the companys forecast. The selling price of $100 per blanket had been set by the companys 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 companys 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 its $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:

As ordered, 220,000 square yards of the new blanket material at a price of $8.25 per square yard were received.

The company produced and sold 20,000 costumes at a price of $100 per blanket

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.

The companys 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.

The companys actual manufacturing overhead for the month was $330,000, of which $170,000 was fixed.

What factors might have contributed to the CFOs decision to adopt a standard costing system?

What business reasons that may have led the companys product manager to

change to the new and more expensive blanket material?

Assuming that the company computes its direct materials variances at the

time of purchase, determine the price and usage variances.

Determine the direct labor rate and efficiency variances.

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

determine the manufacturing overhead variances for May.

Based on your analysis and the information pertaining to the companys

operations for May, does the purchasing decision made by the companys

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

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

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