Question: Sunto Scientific manufactures GPS devices for a
Sunto Scientific manufactures GPS devices for a chain of retail stores. Its most popular model, the Magellan XS, is assembled in a dedicated facility in Savannah, Georgia. Sunto is keenly aware of the competitive threat from smartphones that use Google Maps and has put in a standard cost system to manage production costs of the Magellan XS. It has also implemented a just-in-time system so the Savannah facility operates with no inventory of any kind.
Producing the Magellan XS involves combining a navigation system (imported from Sunto’s plant in Dresden at a fixed price), an LCD screen made of polarized glass, and a casing developed from specialty plastic. The budgeted and actual amounts for Magellan XS for July 2020 were as follows:
The controller of the Savannah plant, Jim Williams, is disappointed with the standard costing system in place. The standards were developed on the basis of a study done by an outside consultant at the start of the year. Williams points out that he has rarely seen a significant unfavorable variance under this system. He observes that even at the present level of output, workers seem to have a substantial amount of idle time. Moreover, he is concerned that the production supervisor, John Kelso, is aware of the issue but is unwilling to tighten the standards because the current lenient benchmarks make his performance look good.
Required
1. Compute the price and efficiency variances for the three categories of direct materials and for direct manufacturing labor in July 2020.
2. Describe the types of actions the employees at the Savannah plant may have taken to reduce the accuracy of the standards set by the outside consultant. Why would employees take those actions? Is this behavior ethical?
3. If Williams does nothing about the standard costs, will his behavior violate any of the standards of ethical conduct for practitioners described in the IMA Statement of Ethical Professional Practice (see Exhibit 1-7 on page 35)?
4. What actions should Williams take?
5. Williams can obtain benchmarking information about the estimated costs of Sunto’s competitors such as Garmin and TomTom from the Competitive Intelligence Institute (CII). Discuss the pros and cons of using the CII information to compute the variances in requirement 1.
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