The Kephart Company produces precision machine parts. Kephart uses a standard cost system, calculates standard cost variances for each department, and reports them to department managers. Managers use the information to improve their operations. Superiors use the same information to evaluate managers’ performance.
Liz Elder was recently appointed manager of the assembly department of the company. She has complained that the system as designed is disadvantageous to her department. Included among the variances charged to the departments is one for rejected units. The inspection occurs at the end of the assembly department. The inspectors attempt to identify the cause of the rejection so that the department where the error occurred can be charged with it. Not all errors can be easily identified with a department, however. The non-identified units are totaled and apportioned to the departments according to the number of identified errors. The variance for rejected units in each department is a combination of the errors caused by the department plus a portion of the unidentified causes of rejects.
1. Is Elder’s complaint valid? Explain the reason(s) for your answer.
2. What would you recommend that the company do to solve its problem with Elder and her complaint?