[39] Gleim #: 1.1.39 -- Source: CMA 0408 2-022
Jura Corporation is developing standards for the next year. Currently XZ-26, one of the material components, is being purchased for $36.45 per unit. It is expected that the component’s cost will increase by approximately 10% next year and the price could range from $38.75 to $44.18 per unit, depending on the quantity purchased. The appropriate standard for XZ-26 for next year should be set at the
A. Current actual cost plus the forecasted 10% price increase.
B. Lowest purchase price in the anticipated range to keep pressure on purchasing to always buy in the lowest price range.
C. Highest price in the anticipated range to ensure that there are only favorable purchase price variances.
D. Price agreed upon by the purchasing manager and the appropriate level of company management. Answer (A) is incorrect. The actual cost could be more or less depending in the quantity purchased.
Answer (B) is incorrect. The lowest price may not always be in the company's best interests if the quantity required to obtain the lowest price would lead to much higher carrying costs.
Answer (C) is incorrect. Standards should be set tightly enough to provide motivation to purchasing management.
Answer (D) is correct. Standard prices are designed for internal performance measurement. Standards should be attainable, but not so easily as to not provide motivation. Management should decide its objectives and set a standard that will achieve that objective when the standard is met. For example, the lowest price might not be selected if the company is using a JIT system, for which the primary objective is the minimization of inventories.