Chapter 10, Problem 42P

Ogwood Company’s Johnstown Division is a small manufacturer of wooden household items. Al Rivkin, division controller, plans to implement a standard-costing system. Rivkin has collected information from several co-workers that will assist him in developing standards. One of the Johnstown Division’s products is a wooden cutting board. Each cutting board requires 1.25 board feet of lumber and 12 minutes of direct-labor time to prepare and cut the lumber. The cutting boards are inspected after they are cut. Because the cutting boards are made of a natural material that has imperfections, one board is normally rejected for each five that are accepted. Four rubber foot pads are attached to each good cutting board. A total of 15 minutes of direct-labor time is required to attach all four foot pads and finish each cutting board. The lumber for the cutting boards cost $3.00 per board foot, and each foot pad costs $.05. Direct labor is paid at the rate of $8.00 per hour.

Required:

1. 1. Develop the standard cost for direct material and direct labor of a cutting board.
2. 2. Explain the role of each of the following people in developing standards.
   1. a.      Purchasing manager.
   2. b.      Industrial engineer.
   3. c.       Managerial accountant.
3. 3. The production manager complained that the standards are unrealistic, stifle motivation by concentrating only on unfavorable variances, and are out of date too quickly. He noted that his recent switch to cherry for the cutting boards has resulted in higher material costs but decreased labor hours. The net result was no increase in the total cost to produce the product. The monthly reports continue to show an unfavorable material variance and a favorable labor variance despite indications that the workers are slowing down.
   1. a.      Explain why a standard-costing system can strengthen cost management.
   2. b.      Give at least two reasons to explain why a standard-costing system could negatively impact the motivation of production employees.