Concord Farms produces items made from local farm products that are distributed

Question

Concord Farms produces items made from local farm products that are distributed to supermarkets. For many years, Concord’s products have had strong regional sales on the basis of brand recognition; however, other companies have begun marketing similar products in the area, and price competition has become increasingly important. Doug Gilbert, the company’s controller, is planning to implement a standard cost system for Concord and has gathered considerable information from his co-workers on production and material requirements for Concord’s products. Gilbert believes that the use of standard costing will allow Concord to improve cost control and make better pricing decisions.

Concord’s most popular product is strawberry jam. The jam is produced in 10-gallon batches, and each batch requires six quarts of good strawberries. The fresh strawberries are sorted by hand before entering the production process. Because of imperfections in the strawberries and normal spoilage, one quart of berries is discarded for every four quarts of acceptable berries. Three minutes is the standard direct-labor time for sorting required to obtain one quart of acceptable strawberries. The acceptable strawberries are then blended with the other ingredients. Blending requires 12 minutes of direct-labor time per batch. After blending, the jam is packaged in quart containers. Gilbert has gathered the following information from Joe Adams, Concord’s cost accountant.

- Concord purchases strawberries at a cost of $1.60 per quart. All other ingredients cost a total of $.90 per gallon.

- Direct labor is paid at the rate of $18.00 per hour.

- The total cost of material and labor required to package the jam is $.76 per quart.

Adams has a friend who owns a strawberry farm that has been losing money in recent years. Because of good crops, there has been an oversupply of strawberries, and prices have dropped to $1.00 per quart. Adams has arranged for Concord to purchase strawberries from his friend and hopes that $1.60 per quart will help his friend’s farm become profitable again.

Required:

1. Develop the standard cost for the direct-cost components of a 10-gallon batch of strawberry jam. The standard cost should identify the following amounts for each direct-cost component of a batch of strawberry jam: (a) standard quantity, (b) standard price or rate, and (c) standard cost per batch.

2. Citing the specific ethical standards of competence, confidentiality, integrity, and credibility for management accountants (see “IMA Statement of Ethical Professional Practice” in Chapter 1), explain why Joe Adams’s behavior regarding the cost information provided to Doug Gilbert is unethical.

3. As part of the implementation of a standard-costing system at Concord Farms, Doug Gilbert plans to train those responsible for maintaining the standards in the use of variance analysis. Gilbert is particularly concerned with the causes of unfavorable variances. Discuss the possible causes of the following unfavorable variances and identify the individual(s) who should be held responsible: (a) direct-material purchase price variance and (b) direct-labor efficiency variance.

Explanation / Answer

(1)

(a) Standard Cost, Direct Material:

Out of 5 quarts of berries, every 1 quart is discarded.

So, out of 5 quarts, net usable quantity = 4 quarts

For getting 4 usable quarts, we required 5 quarts.

For getting 6 usable quarts, we need (5 / 4 x 6) = 7.5 quarts

Standard quantity, SQ = 10 gallon x 7.5 quarts = 75 quarts

Standard cost of 75 quarts = 75 x $1.60 = $120

Total Standard cost, SC = Standard cost of 75 quarts + ($0.9 per gallon x 10 gallons)

= $120 + $9 = $129

[Note: Standard rate = $1.6]

(b) Standard Cost, Direct labor:

Standard hours, SH = 7.5 quarts x (3 + 12) minutes per quart x 10 gallons = 1,125 minutes = 18.75 hours

Standard Cost, direct labor = SH x $18 per hour

= 18.75 x $18 = $337.5

[Note: Standard rate, SR = $18]

(c) Standard Cost, manufacturing overhead (Packaging)

Standard cost per quart = $0.76

Total standard cost for 10 gallons = $0.76 x SQ = $0.76 x 75 = $57

(d)

Total standard cost of producing 10 gallons = $(129 + 337.5 + 57) = $523.5

(2)

Adams has violated the following ethical standards:

(a) Integrity

At the time of providing cost information to Gilbert, Adam was aware that Concord will be able to source its strawberries from his loss-making friend, therefore any standard based on current cost structure will be overstated. Going ahead, Concord will be able to lower its actual cost by buing lower-price direct material. So a standard costing system built on existing high cost structures will not reflect actual performance and will overstate the material variances.

But Adams did not disclose full information to Gillbert, therefore compromising his integrity by holding back available future information.

(b) Credibility

By acting in the said manner, Adam has lacked in his responsibility of not engaging in misrepresentation of facts, by not revealing to Gillbert the future cost change prospects. Therefore, his credibility has been compromised.

NOTE: Out of 3 questions, the first 2 are answered.

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