Kim’s Costumes had its origin in New Jersey when a group of local residents deci
ID: 2519698 • Letter: K
Question
Kim’s Costumes had its origin in New Jersey when a group of local residents decided to form a group for the purposes of creating custom Halloween costumes for the children. The group of entrepreneurs, along with Kim Rubin, the former plant manager, decided to start their own small business and purchase the manufacturing plant. Under Kim’s leadership, the group developed an initial business plan that called for the new company to focus on producing and selling costumes for various occasions. Based on their experience with the items that were made and sold by the initial group, decided that their initial product would be a brightly colored super hero costume that would be marketed for children under the age of 5, and that could be customized to different market segments to accommodate a variety of customer interests and specifications. The company’s Chief Financial Officer decided to adopt a standard costing system as part of the company’s comprehensive planning and control system. In accordance with this, he determined the standard cost of the company’s blanket to be $74 broken down as follows:
Although the company’s longer term monthly volume was expected to be approximately 24,000 uniforms, the CFO decided to establish the initial standard manufacturing cost per unit based on the more conservative and realistic assumption that the normal monthly production would be 18,000 uniforms during the company’s first year of operation. The projected normal monthly production volume was based on an average monthly sales forecast of 18,000 units, as they had determined that, during the company’s start-up period, it would not have sufficient cash to allow it to maintain very much finished goods inventory. They did not believe this would be a problem however, due to the very short production time for the costumes. Thus, they felt it was reasonable to expect monthly sales and production to be approximately the same and therefore, the expected both work-in-process and finished-goods inventory to be negligible. Due to the importance of the high quality of the raw material used to make the costumes, they did anticipate the need to maintain some minimum level of raw materials inventory. During the first several months of business, the company’s actual results were very similar to the company’s forecast. The selling price of $100 per blanket had been set by the company’s product manager Claudia after considerable and careful market analysis. This pricing seemed appropriate and monthly sales and production had been pretty much as expected. Although she was delighted at the company’s early success, Claudia was always looking for opportunities to grow the business and improve its profitability. In mid-April of the first year, she became aware of a new supplier that sole a unique, high-quality fabric. The only problem was that the new material was slightly more expensive than the material the company was presently using, and Claudia did not believe the company would be able to raise it’s $100 selling price. Nevertheless, she decided to switch suppliers and began using the new material for the May production. So, she placed her initial order for the new material to be received at the end of April. By then, she expected there would be little, if any, existing raw material remaining in inventory. Although she was confident she had made the right decision, she would just have to wait and see. As it turned out, the following actually occurred during the Month of May:
As ordered, 220,000 square yards of the new blanket material at a price of $8.25 per square yard were received.
The company produced and sold 20,000 costumes at a price of $100 per blanket
The company used 110,000 square yards of material and incurred 9,000 direct labor hours at an average cost of $16.90 per hour. The higher average per-hour labor cost was due to bonuses paid to workers for exceeding normal production volumes.
The company’s monthly budgeted manufacturing overhead was $324,000, or $18 per blanket, at normal production volume. Of this amount, $171,000 was considered to be fixed and the remainder was expected to vary with production volume.
The company’s actual manufacturing overhead for the month was $330,000, of which $170,000 was fixed.
Question: 1.What factors might have contributed to the CFO’s decision to adopt a standard costing system?
Explanation / Answer
Answer for 1)
Factors that might contributed the CFO's decision to adopt standard costing System:
1) A standard costing can be very useful for planning and control purposes of it properly used.It helps in estimating what price that the raw materials and other variable costs must be asked for and determination of price based on it.
2)It helps in ascertaining the efficiency by comparing standards with actuals.
3)It helps in finding the area where there is need for improvement.
4)It provides valuable guidance regarding the pricing and production policies.
5)AAlthough it needs lots of ground work,it provides economical means of costing when once it completed
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