Required 1 develop the standard cost for direct

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Financial Accounting: The Impact on Decision Makers
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Chapter 5 / Exercise 5-11A
Financial Accounting: The Impact on Decision Makers
Norton/Porter
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Required: 1. Develop the standard cost for direct material and direct labor of a cutting board. 2. Explain the role of each of the following people in developing standards. a) Purchasing manager. b) Industrial engineer. c) Managerial accountant. 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that the standards are unrealistic, stifle motivation by concentrating only on unfavorable variances, and are out of date too quickly.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 cost 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. a) Explain why a standard-costing system can strengthen cost management. b) Give at least two reasons to explain why a standard-costing system could negatively impact the motivation of production employees. Answers:
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Financial Accounting: The Impact on Decision Makers
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Chapter 5 / Exercise 5-11A
Financial Accounting: The Impact on Decision Makers
Norton/Porter
Expert Verified
b) The role of the industrial engineer in the development of standards includes preparing the bill of materials that specifies the types and quantities of material required; establishing, in conjunction with the production supervisor, any allowances for scrap, shrinkage, and waste; and participating in time studies and test runs to facilitate the establishment of time standards. c) The role of the managerial accountant in the development of standards includes reviewing all information regarding material and labor standards received from other departments, establishing the labor rate standards based on the type of labor required, determining application rates for indirect costs such as material handling and manufacturing overhead, and converting physical standards such as hours and quantities to monetary equivalents. 3. a) Standard costing allows for management by exception. Timely reporting of variances allows management to take corrective action before costs get out of hand. The breakdown of variances into various components helps management trace the source of potential cost problems. Standard costing may also motivate employees to operate more efficiently if they are allowed to participate in setting the standards. b) The standard costing system can have a negative impact on the motivation of employees if the standards are too easily attainable or too difficult to reach. If the standards are too easy, employees may tend to reduce productivity. If they are too difficult, production workers may become frustrated and ignore the standards. Also, standards that are set without production employee input may not be accepted as realistic by those employees.

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