Albrecht 19.pdf - Marriott School

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1004 Part 6 Control in a Management Accounting System | EOC
After six months of operations, Petersen was disturbed over the lack of attention paid to
the standards by his potters. He felt that the potters were just too set in their ways to adhere
to the new system. Many of the potters told Petersen that the new system was “confusing”
and didn’t help them in their work. In reviewing the June production results, the
following actual costs were noted in connection with manufacturing 1,145 toilets:
Materials used:
Raw clay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,900 lbs. @ $0.92 per lb.
Glazing mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,900 lbs. @ $0.78 per lb.
Direct labor:
Molding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200 hrs. @ $15.25 per hour (average)
Glazing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600 hrs. @ $15.00 per hour (average)
Actual variable manufacturing overhead . . . . . . . . . . . . . . . . . . $5,120
Actual fixed manufacturing overhead . . . . . . . . . . . . . . . . . . . . $9,700
1. Compute all cost variances for the month of June.
2. What suggestions do you have for Mr. Petersen regarding his new standard cost system
Source: Adapted from J. K. Shank, “Petersen Pottery” case, Cases in Cost Management: A Strategic
Emphasis (Cincinnati: South-Western, 1996).
AA 19-74
INTERNATIONAL
AA 19-75
ETHICS
Target Costing in Japan
Japan is always a good place for useful insight on innovative management accounting practice
and technique. From early on, the Japanese recognized that the most efficient way to
keep costs down was to design them out of their products, not to reduce them after the
products entered production. This realization reflects a fundamental reality of cost management
in Japan; the majority of a product’s costs (as much as 90 to 95% according to some
experts) are “designed in.” Consequently, effective cost control programs in a Japanese business
typically focus heavily on the design process for a particular product. This is done primarily
using a concept known as target costing, as well as value engineering (VE). Target
costing is used to determine what the market is willing to pay for a product. Using the target
market price (i.e., the price required to win the customer’s business), the manager then
subtracts the target profit to arrive at the target cost. After the target cost is determined, VE
then is used to design the product in order to achieve the prespecified targeted level of
costs. Thus, target costing manages costs by effectively designing into the products and
processes the required costs in order to achieve the desired profit.
What do you think is the effect of target costing and VE on the use of variances
Specifically, will materials usage variances and labor efficiency variances be more or less important
to a firm that strictly uses target costing and VE versus a traditional firm that is more
focused on controlling daily production processes
Cool Air, Inc.
Jack Lear, an internal auditor for Cool Air, Inc., met with Paul Marsh, the manager of the
cost accounting department, to discuss a concern about a possible “glitch” in the standard
cost system. Jack explained that he had been reviewing the employee time cards in the
company division where air-conditioning units and refrigerators were assembled. The time
cards reflected how much employee time was devoted to the assembly of air-conditioning
units and how much time applied to refrigerators. Jack’s concern was that the hours actually
charged for each of these operations always seemed to be right on target with the standard
labor times for each air-conditioning unit and each refrigerator unit assembled; yet Jack had
been told a number of times by employees in the assembly department that the standard
hours for assembling air-conditioning units were too low. The employees felt that they could
not meet these standards without “fudging” their time cards or sacrificing some quality work
in the assembly process. Since company policy emphasized product quality, Jack suspected
that time sheets were being modified by shifting hours worked on air-conditioning units to
the time sheets for assembling refrigerators.
(continued)