Chillout Corporation

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After doing a thorough review of your current costing system and other costing systems as well, JBJ consulting, Inc. has concluded that standard costing is the best costing system for your company when used correctly. We have identified a few problems with your standard costing system that we would like to address.

The first problem with ChillOut Corporation is the overall focus of the organization is too centralized around favorable variances. Managers are awarded bonuses for favorable variances and the computer software only notifies departments when there is an unfavorable variance. The department managers are the ones that determine these rates and are also the ones along with employees that are rewarded bonuses if favorable variances occur. The incentive program is a good way to motivate employees and managers to be more efficient. Although, along with this advantage come some disadvantages. Favorable variances are not always a good thing when the standard predetermined rates are easily reachable. If there is an aggressive continuous improvement process in place, then standard costs must be updated more frequently in order to keep pace with the changes in actual costs. Another problem that can occur is that managers may take actions that are not in the best interest of the corporation. They will prefer an easy standard that allows workers ample time to manufacture a case, this will then cause them to have little incentive to improve processes and methods to reduce manufacturing time and cost. Looking at exhibit 2 it shows that since the corporation switched to standard costing, direct materials and direct labor variances have been favorable over the past two years. This may be the cause of managers not being totally honest or fair. The IMA Statement of Ethical Professional Practice states that each member has the responsibility to communicate information fairly and objectively and disclose all relevant information that could reasonably be expected to...
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