Chapter 11, Problem 11.26AE

Recognize advantages and disadvantages of standard cost and variance analysis in various situations (Learning Objective 4)

The following scenarios describe situations currently facing companies. For each scenario, indicate whether or not a standard costing system would be beneficial in that situation and explain why or why not. Each scenario is independent of the other scenarios.

1. a. As the company grows, the bookkeeping for actual direct material purchases, actual payroll costs, and actual manufacturing overhead is becoming increasingly complex; the number of transactions to be recorded has significantly increased. Much time is being spent by both managers and accountants in the company recording all of the actual transaction data.
2. b. Lean practices are being implemented throughout the organization at all levels and in all departments. One of the goals of the lean movement is to eliminate inventories if at all possible. Another goal is to strive for continuous improvement in both the time spent in the manufacturing process and the amount of materials used in the product.
3. c. The company has started using several real-time operating performance metrics to manage operations. Examples of metrics being used include manufacturing lead time in days, manufacturing volume by day, downtime in hours, material cost by day, and several other measures. These performance metrics are available to management in a dashboard that is updated hourly.
4. d. Management wants to design an incentive system that would pay out monthly incentives to factory workers if certain cost and time standards are achieved (or beaten). The goal of this program would be to increase employee motivation levels.
5. e. An exercise equipment manufacturer has recently installed a robotic manufacturing system. This robotic system will be used for most of the welding, painting, assembly, and testing processes in its facility. The workers who used to do these tasks (welding, painting, assembly, and testing) will be retrained and will instead oversee various production lines rather than working directly on the products.
6. f. The company has recently begun manufacturing a new type of computer chip. The company has very little experience with this type of product or the manufacturing process used for manufacturing the chips. Managers want to be able to have cost benchmarks so that they can judge whether the actual costs are reasonable for this product.
7. g. A rare and expensive chemical is used in the production of the company’s main product. The cost of this material fluctuates wildly on a day-to-day basis, depending on market conditions. In addition, company engineers are continually working to redesign the product to use less of this material. Small incremental decreases in the material usage are being achieved on an ongoing basis.