Cabanarama Inc. designs and manufactures easy-to-set-up beach cabanas that families can set up for picnicking, protection from the sun, and so on. The cabanas come in a kit that includes canvas, lacing, and aluminum support poles. Cabanarama has expanded rapidly from a two-person operation to one involving over a hundred employees. Cabanarama’s founder and owner, Frank Love, understands that a more formal approach to standard setting and control is needed to ensure that the consistent quality for which the company is known continues. Frank and Annette Wilson, his financial vice president, divided the company into departments and designated each department as a cost center. Sales, Quality Control, and Design report directly to Frank. Production, Shipping, Finance, and Accounting report to Annette. In the production department, one of the supervisors was assigned the materials purchasing function. The job included purchasing all raw materials, overseeing inventory handling (receiving, storage, etc.), and tracking materials purchases and use. Frank felt that control would be better achieved if there were a way for his employees to continue to perform in such a way that quality was maintained and cost reduction was achieved. Annette suggested that Cabanarama institute a standard costing system. Variances for materials and labor could then be calculated and reported directly to her, and she could alert Frank to any problems or opportunities for improvement.
1. a. Conceptual Connection: When Annette designs the standard costing system for Cabanarama, who should be involved in setting the standards for each cost component?
b. What factors should be considered in establishing the standards for each cost component?
2. Assume that Cabanarama develops the standards for materials use, materials price, labor use, and labor wages. Who will be assigned responsibility for each and for any resulting variances? Why?