Chapter 10, Problem 40P

Associated Media Graphics (AMG) is a rapidly expanding company involved in the mass reproduction of instructional materials. Ralph Boston, owner and manager of AMG, has made a concentrated effort to provide a quality product at a fair price, with delivery on the promised date. Boston is finding it increasingly difficult to personally supervise the operations of AMG, and he is beginning to institute an organizational structure that would facilitate management control.

One change recently made was the transfer of control over departmental operations from Boston to each departmental manager. However, the Quality Control Department still reports directly to Boston, as do the Finance and Accounting Departments. A materials manager was hired to purchase all raw materials and to oversee the material-handling (receiving, storage, etc.) and recordkeeping functions. The materials manager also is responsible for maintaining an adequate inventory based on planned production levels.

The loss of personal control over the operations of AMG caused Boston to look for a method of efficiently evaluating performance. Dave Cress, a new managerial accountant, proposed the use of a standard-costing system. Variances for material and labor could then be calculated and reported directly to Boston.

Required:

1. 1. Assume that Associated Media Graphics is going to implement a standard-costing system and establish standards for materials and labor. Identify and discuss for each of these cost components:
   1. a.      Who should be involved in setting the standards?
   2. b.      What factors should be considered in establishing the standards?
2. 2. Describe the basis for assignment of responsibility for variances under a standard-costing system.