Question

Although Rust Belt’s service has become the rage of the Great Lakes, profits have been un-impressive. Simon, one of Madison’s employees, scolds his boss: “ Here you are, with the greatest competitive advantage in the history of muffler service, doing no better than any of your rivals.” Madison retorts, “ I’m devoted to science, not business. As long as the enterprise is profitable, I will not interfere with my shop managers.” Simon says that the profitability problem is due to squander-ing of resources by shop managers. The product’s superior price, strong demand, and Madison’s policy of benign neglect have given managers a virtual blank check when it comes to expenditures. Simon says that Madison’s solution is to reduce costs by monitoring shop performance via a standard cost system. Due in large part to early childhood conditioning, Madison does as Simon says.
Cost data for the three shops in Buffalo, New York, for the first year of the standard cost system follow.


a. Calculate materials and labor variances for each of the three Buffalo shops. Evaluate the relative performance of each shop based on the calculated variances.
b. Madison’s cousin Milty, Rust Belt’s MBA intern, presents the following in his analysis of the Buffalo shops under standard costing:
During the standard costing period, 500 of the installations performed by State Street involved the originally installed Madison mufflers and pipes being fully replaced under warranty with new Madison mufflers and pipes. Work at the Dewey Avenue shop has produced 100 original installations requiring full warranty replacement. At the Mt. Hope Avenue shop, only eight installations have required full warranty replacement. This accounts for all known warranty work in Buffalo for installations performed under standard costing. (Warranty replacement services performed before standard costing were not considered.)
Has your interpretation changed? In broad terms, is the standard costing system effectively meeting its objectives? What general improvements should bemade?


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  • CreatedDecember 15, 2014
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