EnerGuard Windows and Doors is a window and door manufacturer in Saskatchewan. Since the company began in 2006, EnerGuard has introduced many product lines. Suppose EnerGuard has been using a standard cost system that bases price and quantity standards on EnerGuard’s historical long-run average performance. Assume EnerGuard’s controller has engaged your team of management consultants to recommend whether EnerGuard should use some basis other than historical performance for setting standards.
Requirements
1. List the types of variances you recommend that EnerGuard compute (for example, direct materials price variance for glass). For each variance, what specific standards would EnerGuard need to develop? In addition to cost standards, do you recommend that EnerGuard develop any nonfinancial standards? Explain.
2. There are many approaches to setting standards other than simply using long-run average historical prices and quantities.
a. List three alternative approaches that EnerGuard could use to set standards and explain how EnerGuard could implement each alternative.
b. Evaluate each alternative method of setting standards, including the pros and cons of each method.
c. Write a memo to EnerGuard’s controller detailing your recommendations. First, should EnerGuard retain its historical data-based standard cost approach? If not, which alternative approach should it adopt? Use the following format for your memo:
Date: __________
To: Controller, EnerGuard
From: __________, Management Consultants
Subject: Standard Costs