Toddler Treasures, Inc.



Toddler Treasures, Inc.

Introduction

Commencing the operations from the cottage industry, Toddler treasure has now become manufacturing company. The CFO of the company has adopted standard costing approach for the normal course of business. Using the standard approach, variance analysis needs to be done to determine the rate and efficiency of the material consumed, labor employed and over head incurred in the production of blankets which is the core product of the company. Product manager of the company is also considering an option to select a different material for the production. The optional material is of far better quality as compare to the current material used in the production..

Issue Identification

As a part of company comprehensive planning and control system, the company CFO, David Reed, has selected Standard costing system for the manufacturing unit. There are number of factors and benefits which have contributed to this decision. The system allows pinpointing deviation from benchmark performance.

In this regard, the company needs to determine quantity and price variances of material used and purchased to detect any unusual deviation. Computation of Labor rate and efficiency allows the management to spot differences from benchmark performance. Similarly, over head variance can assist to notice a usual increase or decrease in over head cost than expected. The product manager has also a choice of replacing current blanket material with another expensive but better quality fabric material. However, it let go of the alternative since the company has to increase the sales price from the level of $100. There is a need of critical review of the decision.

Alternative Generation & Evaluation

Standard Costing System

CFO, David Reed, has selected standard costing system. There are number of factors which can drive the decision. First of all, it enables management accountants to compare the actual cost with standard costs and make appropriate actions to improve the situation. Standard costs are determined by studying the work process in normal circumstances without any inefficiency. This allows management to highlight the gaps and spot the cost centers contributing inefficiencies.

Standard costing also allows variance analysis. The company can make standard costing for performance management. It helps to identify cost centers which need management concern so that appropriate action can be taken to address the situation. Thus, a situation can be rectified as soon as it is detected. It can fix liability for divergence in performance. It is probable to undertake curative measures at the earliest. Standard costing ensures a regular check on different expenditures. It follows management by exception. The goals of different persons are predetermined if the performance is also assessed on the basis of predetermined standards. It draws management attention only when performance is less than the target.

Cost control & eliminating inefficiencies

The fundamental purpose of any costing system is cost control and cost reduction. Like any other system, in standard costing, there are predetermined standards which are analyzed at regular intervals and management endeavors to remove inefficiency if detected in the variance analysis. There are always reasons which caused variances ...