09 Jul discussion
EAD ONLY the case information given below (Case 24.1, It’s Not My Fault). Then read your two classmates answers who have already answered to the questions you will see below. You will then reply to both classmates on whether or not you Agree or Disagree and why?
Read only Case 24.1, It’s Not My Fault
Cabinets, Inc., is a large manufacturer of modular kitchen cabinets, sold primarily to builders and developers. The company uses a standard cost system. Standard production costs have been developed for each type of cabinet; these costs, and any cost variances, are charged to the production department. A budget also has been developed for the sales department. The sales department is credited with the gross profit on sales (measured at standard costs) and is charged with selling expenses and any variations between budgeted and actual selling expenses.
In early April the manager of the sales department asked the production department to fill a rush order of kitchen cabinets for a tract of 120 homes. The sales manager stated that the entire order must be completed by May 31. The manager of the production department argued that an order of this size would take twelve weeks to produce. The sales manager answered: “The customer needs it on May 31, or we don’t get the business. Do you want to be responsible for our losing a customer who makes orders of this size?”
Of course, the production manager did not want to take that responsibility. Therefore, he gave in and processed the rush order by having production personnel work overtime through April and May. As a result of the overtime, the performance reports for the production department in those months showed large, unfavorable labor rate variances. The production manager, who in the past had prided himself on coming in under budget, now has very ill feelings toward the sales manager. He also has stated that the production department will never again accept a rush order.
Ready only these two questions, since your classmates have already read and answered to the two questions
a. Identify any problem that you see in the company’s standard cost system or in the manner in which cost variances are assigned to the responsible managers.
b. Make recommendations for changing the cost accounting system to reduce or eliminate any problems that you have identified
Now Reply to the least two classmates’ responses (Maria and Jenna) which are below:
READ MARIAS RESPONSE AND REPLY (DO YOU AGREE OR DISAGREE AND EXPLAIN)
a. The problem I see is that by rushing the order the production manager is put into an unforeseen bind by the sales manager. The production manager is right not to take another rush job ever. Below is the reason: Factory overhead rate, labor hours, volume for factory overhead are all part of the standard cost. In this standard cost system, the standard cost of the product is compared with the actual figures. In order to complete the rush order, the production manager had his employees work overtime, thus long working hours at a higher pay rate. This results in a higher actual labor cost. Due to increase of labor cost unfavorable rate has occurred. This is not a good thing for the production manager since he is responsible for his department’s labor variance rate.
b. In order to eliminate this problem the labor rate variance should not be charge to the production, instead be charged to the specific order which it has occurred. A second thing we can do is change the standard cost for the particular order. This way it will be easier to make comparison between actual cost and standard cost. If the standard cost for that particular order changes, then the variance may not occur.
NOW READ JENNAS’ RESPONSE AND REPLY (DO YOU AGREE OR DISAGREE AND EXPLAIN)
The problem here is that the production manager is absorbing (being charged with) cost overruns that truly belong to the sales department. Essentially, the rush order required the production manager to suffer labor costs at overtime rates. Because the sales manager promised the customer a specific deadline, the production manager should not be held accountable for exceeding a budget where overtime labor costs were not included.
Consequently, the sales department’s performance reports exaggerate its contribution to the business’s success. Since the basis of gross profit credit to the sales department is standard costs, the actual gross profit on rush orders is overstated simply because the standard cost system disregards any overtime costs associated with filling them.
I would recommend that unfavorable labor rate variances sustained as a result of overtime on rush orders be charged to the sales department rather than the production department. The production manager should not be punished for the extra direct labor costs sustained because the rush order required production outside of the department’s standard capacity. Additional costs associated with rush orders should be classified a normal cost of the rush order, and accordingly included in the cost of goods sold charged against the sales department. This will make the sales department more cognizant of the potential overtime costs, which may result in a decision to reject additional rush orders.
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