Zappy Kitchens manufactures a range of household products. Susan Masters, the company’s management accountant, plans to implement a standard costing system. Masters has collected information from several people in the company that will assist her in developing standards.
One of Zappy’s products is a handcrafted wooden cutting board. Each cutting board requires 1 metre of timber and 20 minutes of direct labour time to prepare and cut the timber. The cutting boards are inspected after they are cut. Because the cutting boards are made of natural wood that has imperfections, one board is normally rejected for every ten that are accepted. Four rubber footpads are attached to each good cutting board. A total of 15 minutes is required to attach all four pads and totis each cutting board. The timber for the cutting boards costs $7.50 per metre, and each footpad costs $0.05. Direct labour is paid at the rate of $25 per hour.
1. Develop the standard cost for direct material and direct labour of one cutting board.
2. Explain the role of each of the following people in developing the standards:
(a) Purchasing manager.
(b) Production manager.
(c) Management accountant.
3. The production manager has complained that the standards are unrealistic, stifle motivation by concentrating only on unfavourable variances, and are out of date too quickly. He noted that the recent switch from sassafras to black-wood for the cutting boards has resulted in higher material costs but decreased labour hours. The net result was no increase in the total cost to produce the boards. However, the monthly cost reports continue to show an unfavourable material variance and a favourable labour variance, despite indications that the workers are slowing down.
(a) Explain how a standard costing system can strengthen cost management.
(b) Provide at least two explanations of why a standard costing system might negatively impact the motivation of production employees?