Case 24.1 – It’s Not My Fault Scenario: Cabinets, Inc., is a large manufacturer

Question

Case 24.1 – It’s Not My Fault

Scenario:  Cabinets, Inc., is a large manufacturer of modular kitchen cabinets, sold primarily to builders and developers. The company uses a standard cost system. Standard production costs have been developed for each type of cabinet; these costs and any cost variances are charged to the production department. A budget also has been developed for the sales department. The sales department is credited with the gross profit on sales (measured at standard cost) and is charged with selling expenses and any variations between budgeted and actual selling expenses.

In early April, the manager of the sales department asked the production department to fill a rush order of kitchen cabinets for a tract of 120 homes. The sales manager stated that the entire order must be completed by May 31. The manager of the production department argued that an order of this size would take 12 weeks to produce. The sales manager answered, “The customer needs it on May 31, or we don’t get the business. Do you want to be responsible for our losing a customer who makes orders of this size?”

Of course, the production manager did not want to take that responsibility. Therefore, he gave in and processed the rush order by having production personnel work overtime through April and May. As a result of the overtime, the performance reports for the production department in those months showed large, unfavorable labor rate variances. The production manager, who in the past had prided himself on coming in under budget, now has very ill feelings toward the sales manager. He also has stated that the production department will never again accept a rush order.

(MUST POST FIRST) Initial Post – As an employee, write an internal memo to your manager addressing the following:

Identify any problem that you see in the company’s standard cost system or in the manner in which cost variances are assigned to the responsible managers.

Make recommendations for changing the cost accounting system to reduce or eliminate any problems that you have identified.

Explanation / Answer

                                                                                                   Date…………

To, Manager

Cabinets, Inc.,

Subject: “Review of standard cost system and recommendations for improvement.”

Respected manager sir,

I have gone through the standard costing system of the company and also checked recent activities related to an order of of kitchen cabinets for a tract of 120 homes.

So on the basis of my study I came to some conclusion that are as follow;

First of all as we know that standard costing system helps a lot in managing our actual costs under control & also helps keeping actual costs in desired direction but apart from this it is also true that standard costing system should be perfect in nature otherwise it will create some unnecessary problems too.

In case of our company it has been seen that there was a problem with the standard timing of production process like; when sales manager accepted order an told to produce within 2 months but production manager asked for a minimum time of 12 weeks. That is why it is clear that our company did not set standard timing for production process that is why each manager like (sales manager and production manager) both are confused and blamed on each other.

So on the basis of this I will suggest for determining perfect standards for time taken in production.

Second thing I will suggest that each manager clearly directed toward their duties so that they can be make responsible in case of any mishappening. When we set standard time for accepting order and for producing then neither sales manager nor production manager will violate their own duties and if they do this then for any variances they will be responsible for their own actions.

Thus I request you to consider my suggestions for bringing some improvements in our standard costing system.

Thanks & Regards

Name of the employee

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