Tiffany Campbell is the cost accountant in a small manufacturing company, Computer Components, Inc. (CC). CC produces components for one of the large computer manufacturers. Its strategy is to provide highly reliable components at the lowest possible price. To help maintain cost competitiveness, Tiffany produces two process cost reports each month, one based on the FIFO method and the other based on the standard cost method. When the reports are complete, costs from the two systems are compared. If actual costs are under control (i.e., within the standard costs) for a particular division, the manager receives a small bonus. If costs have been under control throughout the year, a larger bonus is given at the end of December.

This month Tiffany investigates the results for Kevin Meledrez’s division. Actual direct material costs are higher than standard cost, so the equivalent unit cost is higher than the standard. When she speaks to Kevin about the direct material costs in his division, he argues that the standard cost needs to be changed because the current supplier has increased the cost of a particular part. Kevin believes that he should not be held responsible for costs that are not under his control; when prices change, the standard should also change.

Tiffany asks Kevin whether he had investigated other vendors who sell the same part to see whether the price change was across the board for all vendors. Kevin says that he has used this vendor for a number of years and is satisfied with the quality and timeliness of delivery. He does not believe that another vendor would provide the same quality and service, so he does not want to consider changing suppliers at this time.

ANALYZE INFORMATION:

The following questions will help you analyze the information for this problem. Do not turn in your answers to these questions unless your professor asks you to do so.

A. Identify a variety of reasons why actual costs are likely to be different from standard costs for CC.

B. Discuss whether Kevin would be likely to make the same argument about changing the standard if the supplier’s price had decreased.

C. Describe the pros and cons of changing vendors.

D. Explain the benefit to the company of giving managers bonuses based on comparisons of actual to standard costs.

E. Discuss the advantages and disadvantages of adopting a policy of adjusting the standard cost for changes in vendor prices.

REQUIRED

Suppose Tiffany asks for your advice. Turn in your answers to the following.

F. Use the information you learned from the preceding analyses to write a memo to Tiffany with your recommendation. As you write the memo, consider information that Tiffany needs from you to help her make a final decision.