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Management Insight - costs which will cause management to...

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Management Insight Hywit Dimyadi/iStockphoto. Setting standards can be difficult. Consider  Susan's Chili Factory , which manufactures and sells  chili. The cost of manufacturing Susan's chili consists of the costs of raw materials, labor to convert  the basic ingredients to chili, and overhead. We will use materials cost as an example. Managers  need to develop three standards: (1) What should be the formula (mix) of ingredients for one gallon  of chili? (2) What should be the normal wastage (or shrinkage) for the individual ingredients? (3)  What should be the standard cost for the individual ingredients that go into the chili? Susan's Chili Factory also illustrates how managers can use standard costs in controlling costs.  Suppose that summer droughts have reduced crop yields. As a result, prices have doubled for  beans, onions, and peppers. In this case, actual costs will be significantly higher than standard 
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Unformatted text preview: costs, which will cause management to evaluate the situation. Similarly, assume that poor maintenance caused the onion-dicing blades to become dull. As a result, usage of onions to make a gallon of chili tripled. Because this deviation is quickly highlighted through standard costs, managers can take corrective action promptly. How might management use this raw material cost information? Answer: Management might decide to increase the price of its chili. Or it might revise its recipes to use cheaper ingredients. Or it might eliminate some products until ingredients are available at costs closer to standard. Source: Adapted from David R. Beran, “Cost Reduction Through Control Reporting,” Management Accounting, April 1982, pp. 29–33....
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