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Setting Standards, Ethical Behavior

Quincy Farms is a producer of items made from farm products that are distributed to supermarkets. For many years, Quincy's products have had strong regional sales on the basis of brand recognition. However, other companies have been marketing similar products in the area, and price competition has become increasingly important. Doug Gilbert, the company's controller, is planning to implement a standard costing system for Quincy and has gathered considerable information from his coworkers on production and direct materials requirements for Quincy's products. Doug believes that the use of standard costing will allow Quincy to improve cost control and make better operating decisions.

Quincy's most popular product is strawberry jam. The jam is produced in 10-gallon batches, and each batch requires five quarts of good strawberries. The fresh strawberries are sorted by hand before entering the production process. Because of imperfections in the strawberries and spoilage, one quart of strawberries is discarded for every four quarts of acceptable berries. Six minutes is the standard direct labor time required for sorting strawberries in order to obtain one quart of strawberries. The acceptable strawberries are then processed with the other ingredients: processing requires 18 minutes of direct labor time per batch. After processing, the jam is packaged in quart containers. Doug has gathered the following information from Joe Adams, Quincy's cost accountant, relative to processing the strawberry jam.

1. Quincy purchases strawberries at a cost of $0.60 per quart. All other ingredients cost a total of $0.42 per gallon.
2. Direct labor is paid at the rate of $8.60 per hour.
3. The total cost of direct material and direct labor required to package the jam is $0.31 per quart.

Joe has a friend who owns a strawberry farm that has been losing money in recent years. Because of good crops, there has been an oversupply of strawberries, and prices have dropped to $0.50 per quart. Joe has arranged for Quincy to purchase strawberries from his friend's farm in hopes that the $0.60 per quart will put his friend's farm in the black.

Required:

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1. Which of Doug's coworkers would probably be the least helpful to Doug in setting standards?

Operating personnelThe company's PresidentCost accountantsEngineersThe company's President

Which of the listed factors would be the least relevant to Doug in establishing the standards for direct materials and direct labor?

Current and future market prices for labor and materials.The company's contractual arrangements with suppliers and workers.Engineering studies on manufacturing efficiency.The company's long-range goals and objectives.The company's long-range goals and objectives.

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1. Likely coworkers: operating personnel, cost accountants, and engineers. The operating personnel of each cost center should be involved in setting standards; they are the primary source for quantity information. The materials manager has information on material prices, and personnel have information about wages. The Accounting Department should be involved in standard setting and should provide information about past prices and usage. Finally, industrial engineers can provide input about absolute efficiency. In setting price standards for labor and materials, current and future market conditions and special contractual arrangements need to be considered. Engineering studies on efficiency and the need for proper motivation are major factors for quantity standards.

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2. Develop the standard cost sheet for the prime costs of a 10-gallon batch of strawberry jam. Do not round intermediate calculations. If required, round your answers to the nearest cent.

Strawberries	$fill in the blank 7805fa0abfa9053_1
Other ingredients	fill in the blank 7805fa0abfa9053_2
Sorting labor	fill in the blank 7805fa0abfa9053_3
Processing labor	fill in the blank 7805fa0abfa9053_4
Packaging	fill in the blank 7805fa0abfa9053_5
Total standard cost	$fill in the blank 7805fa0abfa9053_6

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2. The standard cost sheet provides the detail underlying the standard unit cost.

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3. Citing the specific standards of the IMA Statement of Ethical Professional Practice described in Chapter 1, explain why Joe's behavior regarding the cost information provided to Doug is unethical. (CMA adapted)

Joe provided the cost information to Doug quickly and concisely.Joe looked out for his friend's interests when determining the materials cost to report to Doug.Joe provided Doug with accurate and clear direct labor cost information.Joe provided Doug with fair and objectively determined packaging cost information.