Part 1: Case study/problem question (10 marks)

Heaven Company is a small producer of fruit-flavored frozen desserts. For many years, its products have had strong regional sales because of brand recognition; however, other companies have begun marketing similar products in the area, and price competition has become increasingly important. Mark Jade, the companys controller, is planning to implement a standard cost system for Heaven and has gathered considerable information from his coworkers about production and materials requirements for Heaven products. Mark believes that the use of standard costs will allow the company to improve cost control, make better pricing decisions, and enhance strategic management. Heavens most popular product is Strawberry sherbet. The sherbet is produced in 10-gallon batches, each of which requires 6 quarts of good raspberries and 10 gallons of other ingredients. The fresh strawberries are sorted by hand before they enter the production process. Because of imperfections in the raspberries and normal spoilage, 1 quart of berries is discarded for every 4 accepted. The standard direct labor time for sorting to obtain 1 quart of acceptable strawberries is 4 minutes. The acceptable strawberries are then blended with the other ingredients; blending requires 12 minutes of direct labor time per batch. After blending, the sherbet is packaged in quart containers. Mark has gathered the following price information:

• Heaven purchases strawberries for $5.00 per quart. All other ingredients cost $2.50 per gallon.
• Direct labor is paid at the rate of $16.00 per hour.
• The total packaging cost (labor and materials) for the sherbet is $0.75 per quart.

Required

1. Develop the standard cost for the direct cost components of a 10-gallon batch of strawberry sherbet. For each direct cost component, the standard cost should identify the following:
   1. Standard quantity.
   2. Standard rate (or price).
   3. Standard cost per 10-gallon batch, rounded to 2 decimal places (e.g., $13.431 = $13.43).
2. As part of the implementation of a standard cost system at Heaven, Mark plans to train those responsible for maintaining the standards to use variance analysis. He is particularly concerned with the causes of unfavorable variances.
   1. Discuss the possible causes of unfavorable direct materials price variances, identify the individuals who should be held responsible for them, and comment on the implications of these variances on strategic cost management.
   2. Discuss the possible causes of unfavorable direct labor efficiency variances, identify the individuals who should be held responsible for them, and comment on the implications of these variances on strategic cost management.

      Part 1: Case study/problem question (10 marks)

      Heaven Company is a small producer of fruit-flavored frozen desserts. For many years, its products have had strong regional sales because of brand recognition; however, other companies have begun marketing similar products in the area, and price competition has become increasingly important. Mark Jade, the companys controller, is planning to implement a standard cost system for Heaven and has gathered considerable information from his coworkers about production and materials requirements for Heaven products. Mark believes that the use of standard costs will allow the company to improve cost control, make better pricing decisions, and enhance strategic management. Heavens most popular product is Strawberry sherbet. The sherbet is produced in 10-gallon batches, each of which requires 6 quarts of good raspberries and 10 gallons of other ingredients. The fresh strawberries are sorted by hand before they enter the production process. Because of imperfections in the raspberries and normal spoilage, 1 quart of berries is discarded for every 4 accepted. The standard direct labor time for sorting to obtain 1 quart of acceptable strawberries is 4 minutes. The acceptable strawberries are then blended with the other ingredients; blending requires 12 minutes of direct labor time per batch. After blending, the sherbet is packaged in quart containers. Mark has gathered the following price information:

   3. Heaven purchases strawberries for $5.00 per quart. All other ingredients cost $2.50 per gallon.
   4. Direct labor is paid at the rate of $16.00 per hour.
   5. The total packaging cost (labor and materials) for the sherbet is $0.75 per quart.

   6. Required

   7. Develop the standard cost for the direct cost components of a 10-gallon batch of strawberry sherbet. For each direct cost component, the standard cost should identify the following:
      1. Standard quantity.
      2. Standard rate (or price).
      3. Standard cost per 10-gallon batch, rounded to 2 decimal places (e.g., $13.431 = $13.43).
   8. As part of the implementation of a standard cost system at Heaven, Mark plans to train those responsible for maintaining the standards to use variance analysis. He is particularly concerned with the causes of unfavorable variances.
      1. Discuss the possible causes of unfavorable direct materials price variances, identify the individuals who should be held responsible for them, and comment on the implications of these variances on strategic cost management.
      2. Discuss the possible causes of unfavorable direct labor efficiency variances, identify the individuals who should be held responsible for them, and comment on the implications of these variances on strategic cost management.