Standard Costing, Ethical Behavior, Usefulness of Costing Objective 1, 2, 3 Pat James, the purchasing agent for a local plant of the Oakden Electronics Division, was considering the possible purchase of a component from a new supplier. The component's purchase price, $0.90, compared favorably with the standard price of $1.10. Given the quantity that would be purchased, Pat knew that the favorable price variance would help to offset an unfavorable variance for another component. By offsetting the unfavorable variance, his overall performance report would be impressive and good enough to help him qualify for the annual bonus. More importantly, a good performance rating this year would help him to secure a position at division headquarters at a significant salary increase. Purchase of the part, however, presented Pat with a dilemma. Consistent with his past behavior, Pat made inquiries regarding the reliability of the new supplier and the part's quality. Reports were basically negative. The supplier had a reputation for making the first two or three deliveries on schedule but being unreliable from then on. Worse, the part itself was of questionable quality. The number of defective units was only slightly higher than that for other suppliers, but the life of the component was 25% less than what normal sources provided. If the part were purchased, no problems with deliveries would surface for several months. The problem of shorter life would cause eventual customer dissatisfaction and perhaps some loss of sales, but the part would last at least 18 months after the final product began to be used. If all went well, Pat expected to be at headquarters within 6 months. He saw little personal risk associated with a decision to purchase the part from the new supplier. By the time any problems surfaced, they would belong to his successor. With this rationalization, Pat decided to purchase the component from the new supplier. Required: The usefulness of standard costing has been challenged in recent years. Some claim that its use is an impediment to the objective of continuous improvement (an objective that many feel is vital in today's competitive environment). Write a short paper (individually or in asmall group with two or three other students) that analyzes the role and value of standard costing in today's manufacturing environment. Address the following questions: What are the major criticisms of standard costing? Will standard costing disappear, or is there still a role for it in the new manufacturing environment? If so, what is the role? Given the criticisms, can you explain why its use continues to be so prevalent? Will this use eventually change?
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Objective 1, 2, 3
Pat James, the purchasing agent for a local plant of the Oakden Electronics Division, was considering the possible purchase of a component from a new supplier. The component's purchase price, $0.90, compared favorably with the standard price of $1.10. Given the quantity that would be purchased, Pat knew that the favorable price variance would help to offset an unfavorable variance for another component. By offsetting the unfavorable variance, his overall performance report would be impressive and good enough to help him qualify for the annual bonus. More importantly, a good performance rating this year would help him to secure a position at division headquarters at a significant salary increase.
Purchase of the part, however, presented Pat with a dilemma. Consistent with his past behavior, Pat made inquiries regarding the reliability of the new supplier and the part's quality. Reports were basically negative. The supplier had a reputation for making the first two or three deliveries on schedule but being unreliable from then on. Worse, the part itself was of questionable quality. The number of defective units was only slightly higher than that for other suppliers, but the life of the component was 25% less than what normal sources provided.
If the part were purchased, no problems with deliveries would surface for several months. The problem of shorter life would cause eventual customer dissatisfaction and perhaps some loss of sales, but the part would last at least 18 months after the final product began to be used. If all went well, Pat expected to be at headquarters within 6 months. He saw little personal risk associated with a decision to purchase the part from the new supplier. By the time any problems surfaced, they would belong to his successor. With this rationalization, Pat decided to purchase the component from the new supplier.
Required:
- The usefulness of standard costing has been challenged in recent years. Some claim that its use is an impediment to the objective of continuous improvement (an objective that many feel is vital in today's competitive environment). Write a short paper (individually or in asmall group with two or three other students) that analyzes the role and value of standard costing in today's manufacturing environment. Address the following questions:
- What are the major criticisms of standard costing?
- Will standard costing disappear, or is there still a role for it in the new manufacturing environment? If so, what is the role?
- Given the criticisms, can you explain why its use continues to be so prevalent? Will this use eventually change?
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