P$10\mathrm{.}34$

Analysing performance and responsibility; calculating variances: manufacturer LO $10\mathrm{.}5,10\mathrm{.}6,10\mathrm{.}7,10\mathrm{.}8$

Luxurious Laminates uses a standard costing system to assist in the evaluation of production operations. The company has had so many problems in recent months with suppliers and employees that it has hired a new production supervisor, Michelle Thompson. Michelle has been working for the company now for five months and has brought the difficult situation under control.

The director of manufacturing commented: $$Thompson has really done the trick. The change to the new material suppliers and Thompson$$s team$-$building skills and morale$-$boosting activities have really made a difference$.$

Page $483$

These comments were made after a plant tour, where the director observed a very contented workforce, and a review of the monthly performance reports. Included in the latest report were the following variances: direct material $$13860$ favourable and direct labour $$18525$ favourable. These variances were considered outstanding as they are small and they are favourable. $($Luxurious Laminates$$ budgeted material and labour costs are usually about $$1000000$ in total for a similar period.$)$

Additional information:

The company purchased and consumed $45000$ kilograms of direct material at $$23\mathrm{.}10$ per kilogram, and paid $$48\mathrm{.}75$ per hour for $20900$ direct labour hours of activity.

Total units produced were $9500.$

A review of the company$$s standard cost records shows that each completed unit requires $4\mathrm{.}2$ kilograms of direct material at $$26\mathrm{.}40$ per kilogram, and $2\mathrm{.}6$ direct labour hours at $$42$ per hour.

Required

On the basis of the information contained in the performance report, should Luxurious Laminates$$ management be concerned about its variances? Explain why.

Calculate the direct material and the direct labour variances.

Based on your answer to requirement $2,$ should management be concerned about the variances? Explain why.

Are things going as smoothly as the director of manufacturing believes? Evaluate the company$$s variances and determine whether or not the change to a new supplier and Thompson$$s team building and morale boosting activities appear to be working. Explain why.

Consider each of the variances and explain whether or not these are likely to be an outcome of Thompson$$s actions.

P$10\mathrm{.}35$

Setting standards; responsibility for variances: publishing company LO $10\mathrm{.}4,10\mathrm{.}8,10\mathrm{.}9$

Associated Media Graphics $($AMG$)$ is a rapidly expanding company involved in the publication of teaching materials. Ralph Boston, owner and manager of AMG, has made a concentrated effort to provide a quality product at a fair price, with delivery on the promised date. Boston is finding it increasingly difficult to supervise the operations of AMG personally, and he is beginning to institute an organisational structure that will facilitate management control.

One recent change made was the transfer of control over departmental operations from Boston to each departmental manager. However, the quality control department still reports directly to Boston, as do the finance and accounting departments. A materials manager was hired to purchase all raw materials and to oversee the material$-$handling $($such as receiving and storage$)$ and record$-$keeping functions. The materials manager is also responsible for maintaining an adequate inventory based on planned production levels.

The loss of personal control over the operations of AMG caused Boston to look for a method of evaluating performance efficiently. Dave Cress, a new management accountant, proposed the use of a standard costing system. Variances for material and labour could then be calculated and reported directly to Boston.

Required

Assume that AMG is going to implement a standard costing system and establish standards for materials and labour. For each of these cost components, identify and discuss:

$($a$)$ which managers should be involved in setting the standards $($consider each standard separately$)$

$($b$)$ what types of information should be considered in establishing the standards.

Describe the basis that should be used to assign responsibility for variances to particular managers or departments under a standard costing system.

In the light of your answers to requirements $1$ and $2,$ outline a revised reporting structure for AMG that will allow the company to evaluate and control manufacturing performance.