Compute the price and efficiency variances
Price and efficiency variances, problems in standard-setting, benchmarking. New Fashions manufactures shirts for retail chains. Andy Jorgenson, the controller, is becoming inerasably disenchanted with New Fashion’s standard costing system. The budgeted and actual amounts for direct materials and direct manufacturing labor for June 2009 were:
There were no beginning or ending inventories of materials. Standard costs are based on a study of the operations conducted by an independent consultant six months earlier. Jorgenson observes that since that study he has rarely seen an unfavorable variance of any magnitude. He notes that even at their current output levels, the workers seem to have a lot of time for sitting around and gossiping. Jorgenson is concerned that the production manager, Charlie Fenton, is aware of this but does not want to tighten up the standards because the lax standards make his performance look good.
1. Compute the price and efficiency variances of New Fashions for direct materials and direct manufacturing labor in June 2009.
2. Describe the types of actions the employees at New Fashions may have taken to reduce the accuracy of the standards set by the independent consultant. Why would employees take those actions? Is this behavior ethical?
3. If Jorgenson does nothing about the standard costs, will his behavior violate any of the Standards of Ethical Conduct for Management Accountants described in Exhibit 1-7?
4. What actions should Jorgenson take?
5. Jorgenson can obtain benchmarking information about the estimated costs of New Fashion’s major competitors from Benchmarking Clearing House (BCH). Discuss the pros and cons of using the BCH information to compute the variances in requirement1.