Sole Purpose Shoe Company

Sole Purpose Shoe Company is owned and operated by Sarah Charles. The company manufactures casual shoes, with manufacturing facilities in your state. Sarah began the business this year, and while she has a great deal of experience in manufacturing popular and comfortable shoes, she needs some help in evaluating her results for the year, and asks for your help.

Starting Questions

Sarahs first questions for you have to do with the general ideas and terminology used to evaluate variances.

Provide answers to the following questions (1)-(3).

1. Why might Sarah want to use standard costs to compare with her actual costs?

a. Standard costs give management a cost structure for products that is applicable for the entire life of the business.

b. Standard costs allow management to motivate employees by comparing their performance to what it would be under perfect conditions.

c. Management can evaluate the differences between standard costs and actual costs to focus on correcting the cost variances.

2. What are some possible drawbacks to using standard costs that Sarah might consider?

a. Standards limit operating improvements because employees may be discouraged from improving beyond the standards.

b. Standards may become stale in a dynamic manufacturing environment.

c. Employees may focus only on efficiency improvement and their own operations rather than considering the larger objectives of the organization.

d. Since standards are impossible to attain, they are a distraction from the work at hand.

e. Since standards never change, they do not reflect reality.

3. Sarah wants to be sure she understands the basic definitions involved:

Answer the following questions by selecting the correct words.

A favorable variance occurs when the actual cost (what the product does cost) is the standard cost (what the product should cost). A favorable variance is represented by a number, indicating that costs are than expected.

An unfavorable variance occurs when the actual cost (what the product does cost) is the standard cost (what the product should cost). An unfavorable variance is represented by a number, indicating that costs are than expected.