Reference no: EM13510730

Price and efficiency variances, problems in standard-setting, and benchmarking. Stuckey, Inc., manufactures industrial 55 gallon drums for storing chemicals used in the mining industry. The body of the drums is made from aluminum and the lid is made of chemical resistant plastic. Andy Jorgenson, the controller, is becoming increasingly disenchanted with Stuckey's standard costing system.

The budgeted information for direct materials and direct manufacturing labor for June 2011 were as follows: Drums and lids produced Direct materials price per sq. ft. Aluminum Plastic Direct materials per unit Aluminum (sq. ft.) Plastic (sq. ft.) Direct labor-hours per unit Direct labor cost per hour Budget 5,200 $ 3.00 $ 1.50 20 7 2.3 $12.00 The actual number of drums and lids produced was 4,920. The actual cost of aluminum and plastic was $283,023 (95,940 sq. ft.) and $50,184 (33,456 sq. ft.), respectively.

The actual direct labor cost incurred was $118,572 (9,840 hours). 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 Stuckey, Inc., for each direct material and direct manufacturing labor in June 2011.

2. Describe the types of actions the employees at Stuckey, Inc., 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 on page 16?

4. What actions should Jorgenson take?

5. Jorgenson can obtain benchmarking information about the estimated costs of Stuckey's major competitors from Benchmarking Clearing House (BCH). Discuss the pros and cons of using the BCH information to compute the variances in requirement.