Budgeted Amounts Actual Amounts Magellan XS units produced Navigation systems cost Navigation systems Polarized glass cost Sheets of polarized glass used Plastic casing cost Ounces of specialty plastic used Direct manufacturing labor costs Direct manufacturing labor-hours 4,000 4,400 $89,000 $81,600 4,080 4,450 $40,000 $40,300 800 816 $12,000 $12,500 4,000 4,250 $36,000 $37,200 2,000 2,040 The controller of the Savannah plant, Jim Williams, is disappointed with the standard costing system in place. The standards were developed on the basis of a study done by an outside consultant at the start of the year. Williams points out that he has rarely seen a significant unfavorable variance under this system. He observes that even at the present level of output, workers seem to have a substantial amount of idle time. Moreover, he is concerned that the production supervisor, John Kelso, is aware of the issue but is unwilling to tighten the standards because the current lenient benchmarks make his performance look good. 1. Compute the price and efficiency variances for the three categories of direct materials and for direct manufacturing labor in July 2017. 2. Describe the types of actions the employees at the Savannah plant may have taken to reduce the ac- curacy of the standards set by the outside consultant. Why would employees take those actions? Is this behavior ethical? Required 3. If Williams does nothing about the standard costs, will his behavior violate any of the standards of ethical conduct for practitioners described in the IMA Statement of Ethical Professional Practice (see Exhibit 1-7 on page 17)? 4. What actions should Williams take? 5. Williams can obtain benchmarking information about the estimated costs of Sunto's competitors such as Garmin and TomTom from the Competitive Intelligence Institute (CII). Discuss the pros and cons of using the CIl information to compute the variances in requirement 1.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Price and efficiency variances, benchmarking and ethics. Sunto Scientic manufactures GPS devices for a chain of retail stores. Its most popular model, the Magellan XS, is assembled in a dedicated facility in Savannah, Georgia. Sunto is keenly aware of the competitive threat from smartphones that use Google Maps and has put in a standard cost system to manage production of the Magellan XS. It has also implemented a just-in-time system so the Savannah facility operates with no inventory of any kind. Producing the Magellan XS involves combining a navigation system (imported from Sunto’s plant in Dresden at a xed price), an LCD screen made of polarized glass, and a casing developed from specialty plastic.
The budgeted and actual amounts for Magellan XS for July 2017 were as follows:

Budgeted Amounts
Actual Amounts
Magellan XS units produced
Navigation systems cost
Navigation systems
Polarized glass cost
Sheets of polarized glass used
Plastic casing cost
Ounces of specialty plastic used
Direct manufacturing labor costs
Direct manufacturing labor-hours
4,000
4,400
$89,000
$81,600
4,080
4,450
$40,000
$40,300
800
816
$12,000
$12,500
4,000
4,250
$36,000
$37,200
2,000
2,040
The controller of the Savannah plant, Jim Williams, is disappointed with the standard costing system
in place. The standards were developed on the basis of a study done by an outside consultant at the start of
the year. Williams points out that he has rarely seen a significant unfavorable variance under this system.
He observes that even at the present level of output, workers seem to have a substantial amount of idle time.
Moreover, he is concerned that the production supervisor, John Kelso, is aware of the issue but is unwilling
to tighten the standards because the current lenient benchmarks make his performance look good.
1. Compute the price and efficiency variances for the three categories of direct materials and for direct
manufacturing labor in July 2017.
2. Describe the types of actions the employees at the Savannah plant may have taken to reduce the ac-
curacy of the standards set by the outside consultant. Why would employees take those actions? Is
this behavior ethical?
Required
3. If Williams does nothing about the standard costs, will his behavior violate any of the standards of
ethical conduct for practitioners described in the IMA Statement of Ethical Professional Practice (see
Exhibit 1-7 on page 17)?
4. What actions should Williams take?
5. Williams can obtain benchmarking information about the estimated costs of Sunto's competitors such
as Garmin and TomTom from the Competitive Intelligence Institute (CII). Discuss the pros and cons of
using the CIl information to compute the variances in requirement 1.

Definition Definition System of assigning an estimated cost to the product (instead of the actual cost) so that the product cost can be determined well in advance and the pricing of the product can be done on time. Since the actual cost cannot be predicted at the initial stage of the production process, the estimated cost is recorded in the books. Any deviation of the estimated cost of the actual cost is adjusted in the books at the end of the period.

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