Windsor Healthcare, Inc., a manufacturer of custom-designed home health-care equipment, has been in business for 15 years. Last year, in an effort to better control the costs of their products, the controller implemented a standard cost system. Reports are issued monthly for tracking performance, and any negative variances are further investigated.
The production manager complained that the standards are unrealistic, stifle motivation by concentrating only on negative variances, and are out of date too quickly. He noted that his recent switch to titanium for the wheelchairs has resulted in higher material costs but decreased labor time. The net result was no increase in the total cost of producing the wheelchair. The monthly reports continue to show a negative material variance and a positive labor variance, despite the fact that there are indications that the workers are slowing down.
a. Describe several ways that a standard cost system strengthens management cost control.
b. Describe at least two reasons why a standard cost system may negatively impact the motivation of production employees.