Question

New Fashions Inc. manufactures shirts for retail chains. Andy Jorgenson, the controller, is
becoming increasingly disenchanted with New Fashions’s standard costing system. The
budgeted and actual amounts for direct materials and direct manufacturing labour for June 2018
were as follows:

There were no beginning or ending inventories of materials.
Budgeted Amounts Actual Amounts
Shirts manufactured 6,000 6,732
Direct material costs $30,000 $30,294
Direct material units (rolls of cloth) 600 612
Direct manufacturing labour costs $27,000 $27,693
Direct manufacturing labour-hours (DMLH) 1,500 1,530
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 unfavourable
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.
Required
1. Compute the rate and efficiency variances of New Fashions for direct materials and direct
manufacturing labour in June 2018.
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 behaviour ethical?
3. If Jorgenson does nothing about the standard costs, will his behaviour violate any ethical
conduct guidelines?
4. What actions should Jorgenson take?
5. Jorgenson can obtain benchmarking information about the estimated costs of New
Fashions’s major competitors from Benchmarking Clearing House (BCH). Discuss the pros
and cons of using the BCH information to compute the variances in requirement.

Answer 1

1. Compute the rate and efficiency variances of New Fashions for direct materials and direct
manufacturing labour in June 2018.
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 behaviour ethical?
3. If Jorgenson does nothing about the standard costs, will his behaviour violate any ethical
conduct guidelines?
4. What actions should Jorgenson take?
5. Jorgenson can obtain benchmarking information about the estimated costs of New
Fashions’s major competitors from Benchmarking Clearing House (BCH). Discuss the pros
and cons of using the BCH information to compute the variances in requirement.

Refer to the below images for the above mentioned questions, in a detailed way of solution with explanations.

O input Realoixement direct materials per Budgeted Shirt - 600 rolls : 6000 Shirts = 0.10 roll of cloth 6000 Shirts Budgeted direct manufacturing labor hours a Soo hours per unt (Shirt ? -0-25 hours Budgeted direct Materials cast = $ 30000 600 = $5o per roll Budgeted direct manufacturing labor cost per hour = $ 27000 1500 - $ 18 per hour Actual out pur achieved = 6732 Shirts Actual costs Incorred Qty. actual Input Qty * Actual rate) particulars Flexible Budget (Budgeted Input Allowed for Actual output x Budgered Rate Actual Input aty x Budgeted - Rate $30294 (612x300) $30600 (6732 XO10 X $ SO $33660 Direct Materials $306F $ 3060F Rate variance Efficiency Noviance $27693 Direct Manufacturing lobor (1530 x $18) $27540 (6732 x0.25 X $18) $30294 $113 u $2754F Rate variance Efficieny Variance

@. Reajuixement a) b) c) Actions employees may have taken include: adding steps that are not necessary in worncing on a Shirt Talking more time on each stop than is necessary. Creating problem situations so that the budgeted amount of average downtime will be overstated. Creating defects in Shirts so that the budgeted amount of average re work will be verstaked. Employees may take these actions for several possible reasons. a) by 9 They may be paid on a piece arate basis with incentives for prodation levels above budget. They may want to create a relaxed world atmosphere, and a less demanding Standard can reduce stress, They have a them vs. Us" mentality rather than a partnership perspective. They may want to gain all the benefits that ensu.e from superior performance Liob security, wage rate increases) without putting in the extra effort required.) d) This behaviour is onethical if it is deliberately to undermine the credibility of the standards at New Fashions . designed used

rements alut if Jorgenson does nothing about standard costs, his behavior will violate a number of Standards of ethical conduct for practitioners of management accounting. In particular, he would violate the a) standards of comperence, by not performing grotessional duties in accordance with relevant standards. b) Standards of integrity by passively subverting the attainment of the organiaation's objective to control costs; and. Standards of credibility, by not communicating information fairly § not disclosing all relevant cost information. ent G 4 : Reasonrement Jorgenson should discuss the situation with Fenton and point out that the standards are lox and that this practice is on ethical. If Fenton does not agree to change, Jorgenson should escalate the issue up the hierarchy in order to effect change. If organizational change is not forthcoming, Jorgenson should be prepared to resign rather than compromise his professional ethics.

③ House information Requixement how it may Main Pros of using Benchmarking clearing to compute variances are : a Highlights to New Fashions in a direct way (or) may not be cast - competitive. b) provides a reality check" to many internal about efficiency cors effectiveness. positions main cons are: al New Fashions may not be comparable to companies in the database. b cast data about other companies may not be reliable. e cost of Benchmarking clearing House reports- no