To:   Diana Craig, Certified Management Accountant From:   Edward Golding, President, Crunchy Chips Subject:   Description and Data Relating to the Production of Our Plain Potato Chips Date:   September 28, 2017 The manufacturing process for potato chips begins when the potatoes are placed into a large vat in which they are automatically washed. After washing, the potatoes flow directly to an automatic peeler. The peeled potatoes then pass by inspectors, who manually cut out deep eyes or other blemishes. After inspection, the potatoes are automatically sliced and dropped into the cooking oil. The frying process is closely monitored by an employee. After the chips are cooked, they pass under a salting device and then pass by more inspectors, who sort out the unacceptable finished chips (those that are discolored or too small). The chips then continue on the conveyor belt to a bagging machine that bags them in 1-pound bags. After bagging, the bags are placed in a box and shipped. The box holds 15 bags. The raw potato pieces (eyes and blemishes), peelings, and rejected finished chips are sold to animal feed producers for $0.16 per pound. The company uses this revenue to reduce the cost of potatoes. We would like this reflected in the price standard relating to potatoes. Crunchy Chips purchases high-quality potatoes at a cost of $0.245 per pound. Each potato averages 4.25 ounces. Under efficient operating conditions, it takes four potatoes to produce one 16-ounce bag of plain chips. Although we label bags as containing 16 ounces, we actually place 16.3 ounces in each bag. We plan to continue this policy to ensure customer satisfaction. In addition to potatoes, other raw materials are the cooking oil, salt, bags, and boxes. Cooking oil costs $0.04 per ounce, and we use 3.3 ounces of oil per bag of chips. The cost of salt is so small that we add it to overhead. Bags cost $0.11 each and boxes $0.52 each. Our plant produces 8.8 million bags of chips per year. A recent engineering study revealed that we would need the following direct labor hours to produce this quantity if our plant operates at peak efficiency: Raw potato inspection   3,200 Finished chip inspection   12,000 Frying monitor   6,300 Boxing   16,600 Machine operators   6,300 I’m not sure that we can achieve the level of efficiency advocated by the study. In my opinion, the plant is operating efficiently for the level of output indicated if the hours allowed are about 10% higher. The hourly labor rates agreed upon with the union are: Raw potato inspectors   $15.20 Finished chip inspectors   10.30 Frying monitor   14.00 Boxing   11.00 Machine operators   13.00 Overhead is applied on the basis of direct labor dollars. We have found that variable overhead averages about 116% of our direct labor cost. Our fixed overhead is budgeted at $1,135,216 for the coming year. Required: 1. By using a standard costing system, Crunchy Chips can increase control  of its manufacturing inputs. By developing price and quantity standards for each input, management can compute price and usage variances  for each input. Since a standard costing system provides more information, control is enhanced. For example, since managers have the most control over usage of inputs, knowing the usage variances provides specific information about where action is needed. Moreover, by breaking out price variances, which are not as controllable, performance evaluation is improved. 2. The engineering standards are ideal standards. The president’s concern is probably reflecting doubt that the labor standards can  be achieved. If pressure is applied to workers to achieve perfection standards, the outcome is likely to be unsatisfactory  Workers may become frustrated  and lower  their performance as a consequence. Many firms elect to use currently attainable standards in lieu of ideal standards. The standard suggested by the president is a good starting point. If experience indicates that his standard is too loose, then the standard can be adjusted later on. 3. Form a group with two or three other students. Develop a standard cost sheet for Crunchy Chips’ plain potato chips. Round all computations to four decimal places. Crunchy Chips Standard Cost Sheet   Direct materials:     Potatoes $   Cooking oil     Bags     Boxes   $ Direct labor:     Potato inspection $   Chip inspection     Frying monitor     Boxing     Machine operators   $ Variable overhead     Fixed overhead     Direct materials     Cost per box   $ Cost per bag   $                   4. Suppose that the level of production was 8.8 million bags of potato chips for the year as planned. If 9.5 million pounds of potatoes were used, compute the materials usage variance for potatoes. Enter the amount as a positive number and select Favorable or Unfavorable. $