Question

Jan Dan Inc. (JDI) is a specialty frozen food processor located in the southeastern United States. Since its founding in 1992, JDI has enjoyed a loyal local clientele that is willing to pay premium prices for the high-quality frozen foods it prepares from specialized recipes. In the past two years, the company experienced rapid sales growth in its operating region and had many inquiries about supplying its products on a national basis. To meet this growth, JDI expanded its processing capabilities, which resulted in increased production and distribution costs. Moving onto the national scene also caused JDI to encounter pricing pressure from competitors outside its region.
Because JDI wants to continue expanding, Nick Guice, the company’s chief executive officer, engaged a consulting firm to assist in determining its best course of action. The consulting firm concluded that premium pricing is sustainable in some areas, but if sales growth is to be achieved, JDI must make price concessions in some other areas. Also, to maintain profit margins, costs must be reduced and more tightly controlled. The consulting firm recommended the implementation of a standard cost system that would facilitate a flexible budgeting system to better accommodate the changes in demand that can be expected when serving an expanding market area.
Recently, Guice met with his management team and explained the consulting firm’s recommendations. He then assigned the task of setting standards to his management team. After discussing the situation with their respective staffs, the management team met to review the matter.
Janie Morgan, purchasing manager, advised that meeting expanded production would necessitate obtaining basic food supplies from companies other than JDI’s traditional sources. This would entail increased raw material and shipping costs and might result in lower-quality supplies. Consequently, these increased costs would need to be counterbalanced by reduced costs in the processing department if current cost levels are to be maintained or reduced.
Dan Walters, processing manager, suggested that the need to accelerate processing cycles to increase production, coupled with the possibility of receiving lower-grade supplies, could be expected to result in poorer quality and a greater product rejection rate. Under these circumstances, per unit labor utilization cannot be maintained or increased, and forecasting future unit labor content becomes very difficult.
Corinne Kelly, production engineer, advised that if the equipment is not properly maintained and thoroughly cleaned at prescribed daily intervals, it can be anticipated that the quality and unique taste of the frozen food product will be affected. Kent Jackson, vice president of sales, stated that if quality cannot be maintained, JDI cannot expect to increase sales to the levels projected.
When Guice was apprised of the problems enumerated by his management team, he advised them that if agreement could not be reached on appropriate standards, he would arrange to have them set by the consulting firm, and everyone would have to live with the results.

Required
A. List the major advantages of using a standard cost system.
B. List disadvantages that can result from using a standard cost system.
C. Identify those who should participate in setting standards, and describe the benefits of their participation in the standard-setting process.
D. Explain the general features and characteristics associated with the introduction and operation of a standard cost system that make it an effective tool for cost control.
E. What could be the consequences if Nick Guice has the standards set by the consulting firm?
F. Explain what is meant by variance and variance analysis.
G. Discuss material variances and why they might occur at JDI.
H. Explain overhead variances in the context of this case. Include a discussion of variable and fixed overhead variances.



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  • CreatedMarch 11, 2015
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