Duncan Company manufactures a variety of products in a variety of departments, and evaluates departments and departmental managers by comparing actual costs and outputs relative to their budgets. Departmental managers help create the budgets and usually provide information about input quantities for materials, labour, and overhead costs. Sheryl Maki is the manager of the department that produces Product Z. Maki has estimated these inputs for Product Z:
Input Budget Quantity per Unit of Output
Direct materials...........................................3 kilograms
Direct manufacturing labour.............................20 minutes
Machine time..............................................10 minutes
The department produces about 100 units of Product Z each day. Maki's department always gets excellent evaluations, sometimes exceeding budgeted production quantities. Each 100 units of Product Z uses, on average, about 32 hours of direct manufacturing labour (four people working eight hours each), 295 kilograms of materials, and 16.5 machine-hours.
Top management of Duncan Company has decided to implement budget standards that will challenge the workers in each department and it has asked Maki to design more challenging input standards for Product Z. Maki provides top management with the following input quantities:
Input Budget Quantity per Unit of Output
Direct materials.........................................2.95 kilograms
Direct manufacturing labour............................19.2 minutes
Machine time................................................9.9 minutes
Required
Discuss the following:
1. Are these challenging standards for Maki's department?
2. Why do you suppose Maki picked these particular standards?
3. What steps can Duncan Company top management take to make sure Maki's standards really meet the goals of the firm?