Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 42

Behavioral and Strategic Considerations Chen, Inc., produces a line of soy-based products, including a premium soy-milk that comes in different flavors. This company, founded by Alan Chen, has been doing business in the United States for the past 15 years. In the face of competition associated with recent entrants into this line of business, the controller of the company, Rosita Chang, implemented a standard cost system to better control costs of the soy-milk product line. Financial reports for tracking performance are issued monthly, and any unfavorable cost variances are investigated by management.

Recently, the production manager of the soy-milk line complained to Chang that the standards were unrealistic, that they have a negative impact on motivation (because the system focuses only on unfavorable variances), and that, because of global forces of supply and demand, they quickly become out of date. The production manager noted that his recent switch to a newly available homogenizing agent resulted in higher material-acquisition costs but decreased labor hours to produce the soy-milk. These two changes, when combined, had a negligible effect on manufacturing cost per unit. However, the monthly performance reports continued to show a favorable labor variance (despite evidence that the workers were slowing down or slacking off a bit) and an unfavorable material variance.

Required

1. Describe several ways that a standard cost system could improve (i.e., strengthen) an overall management control system.

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2. Give at least two reasons how a standard cost system could have a negative impact on employee motivation.

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3. Explain strategic issues regarding the decision to adopt a standard costing system, particularly in light of competitive forces confronting this company. (Hint: think in terms of the costs and benefits associated with the use of standard costs as part of a comprehensive management accounting and control system.)

Step 1 of 4

The manufacturing process includes different types of costs which includes fixed costs and variable costs. It includes costs related to raw material, direct labor and direct manufacturing overheads. When variable costs are deducted from the sales price then it is called as contribution.