Cabinets, Inc., is a large manufacturer of modular kitchen cabinets, sold primar
ID: 2358259 • Letter: C
Question
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..... 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.Explanation / Answer
Please find the answer as follows:
Part A:
In standard cost system, the standard cost of a product is compared with the actual cost. As the overtime premium would have increased the actual labor cost resulting in an unfavorable labor rate variance. One unfavorable variance may be the cause of another favorable variance. In the given problem, the volume variance (because of increase in hours) would be favorable, and therefore the production manager should be held responsible by netting of both labor rate and volume variance.
Part B:
The labor rate variance would definitely be negative a) but it should not have been charged to production manager rather it should have been charged to that specific order. That is, cost should have been allocated to the order. The production manager should not be held responsible for overtime costs. or b) the overtime premium could have been charged to general factory overhead pool.