Assignment of Decision Rights for Setting Standards

question 1

Essay

Assignment of Decision Rights for Setting Standards
Attendant Media Graphics (AMG) is a rapidly expanding company involved in the mass reproduction of instructional materials. AMG is organized into a number of production departments, each of which is responsible for a particular stage of the production process, such as copyediting, typesetting, printing, and binding. An engineering department provides technical assistance to the various production units. Ralph Davis, owner and manager of AMG, has made a concentrated effort to provide a quality product at a competitive price with delivery on the promised due date. Expanding sales have been attributed to this philosophy. Davis is finding it increasingly difficult to personally supervise the operations of AMG and is beginning to institute an organizational structure that would facilitate management control.
One change recently made was the designation of operating departments as cost centers, with control over departmental operations transferred from Davis to each departmental manager. However, quality control still reports directly to Davis, as do the finance and accounting functions. A materials manager was hired to purchase all raw materials and to oversee the inventory handling (receiving, storage, etc.) and record-keeping functions. The materials manager is also responsible for maintaining an adequate inventory based upon planned production levels.
The loss of personal control over the operations of AMG caused Davis to look for a method of efficiently evaluating performance. Dave Cress, a new cost accountant, proposed the use of a standard cost system. Variances for materials and labor could then be calculated and reported directly to Davis.
Required:
a. Assume that AMG is going to implement a standard cost system and establish standards for materials, labor, and manufacturing overhead. For each of these cost components, identify and discuss.
(i) Who should be involved in setting the standards?
(ii) The factors that should be considered in establishing the standards.
b. Describe the basis for assignment of responsibility under a standard cost system.

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Definitions:

Implicit Costs

The opportunity costs associated with a company's use of resources it owns, representing potential income lost.

Future Earnings

The expected profit or income generated by an investment, job, or business over a future period.

Younger Workers

Individuals entering or in the early stages of their professional careers, often characterized by being newer to the workforce.

Moving Costs

Expenses associated with relocating resources or operations from one location to another, including transportation, labor, and setup costs.