Week 5 Individual Assignment
Melanie Lentz
FIN/540
February 20, 2012
Hillman Lo

Week 5 Individual Assignment
Problem Set 1.
TasteeFruit Company is a small producer of fruit-flavored frozen desserts. For many years, its products have had strong regional sales on the basis of brand recognition. However, other companies have begun marketing similar products in the area, and price competition has become increasingly important. John Wakefield, the company’s controller, is planning to implement a standard-costing system and has gathered considerable information on production and materials requirements for TasteeFruit’s products. He believes that the use of standard costing will allow the company to make better pricing decisions. TasteeFruit’s most popular product is raspberry sherbet. The following information is provided: * The sherbet is produced in 10 gallon batches * Each batch requires 6 six quarts of good raspberries
The fresh raspberries are sorted by hand before entering the production process. Because of imperfections in the raspberries and normal spoilage, 1 quart of berries is discarded for every 4 quarts accepted. 3 minutes is the standard direct-time for the sorting required to obtain
. 1 quart of acceptable raspberries. The acceptable raspberries are then blended with the other ingredients; blending requires 12 minutes of direct-labor time per batch. After blending, the sherbet is packaged in quart containers. Wakefield has gathered the following information from Teresa Adams, TasteeFruit’s cost accountant: * TasteeFruit purchases raspberries at a cost of $0.80 per quart. * All other ingredients cost a total of $0.45 per gallon. * Direct labor is paid at the rate of $9 per hour. * The total cost of material and labor required to package the sherbet is $0.41 per quart. Adams has a friend who owns a berry farm that has been losing money in recent years. Because of good crops, an oversupply of raspberries has been available, and prices have dropped to $0.50 per quart. Adams has arranged for TasteeFruit to purchase raspberries from her friend and hopes that $0.80 per quart will help her friend’s farm become profitable again. a) Develop the standard cost of direct material, direct labor, and packaging for a 10 gallon batch of raspberry sherbet. b) As part of the implementation of a standard-costing system, Wakefield plans to train those responsible for maintaining the standards in the use of variance analysis. He is particularly concerned with the causes of unfavorable variances. As his assistant, prepare a page for a company training document that discusses the following: 1. The possible causes of unfavorable material price variances and identifies the individual(s) who should be held responsible for these variances. 2. The possible causes of unfavorable labor efficiency variances and identifies the individual(s) c). Citing the specific ethical standards of competence, confidentiality, integrity, and objectivity for management accountants, explain why Adams’s behavior regarding the cost information provided to Wakefield is unethical. (See the Appendix to Chapter 1 for these ethical standards.)

PROBLEM SET 1 SOLUTION
Part A. Standard Cost | Quantity | Price | Total | Direct Materials: | | | | Raspberries | 7.5 | $0.80 | $6.00 | Other Ingredients | 10 | $0.45 | $4.50 | Total Direct Materials | | | $10.50 | Direct Labor: | | | | Sorting | 18 | $0.15 | $2.70 | Blending | 12 | $0.15 | $1.80 | Total Direct Labor | | | $4.50 | Packaging | 40 | $0.41 | $16.40 | Total Standard Cost | | | $31.40 |

Direct materials per batch: 6 quarts accepted raspberries equals 7.5 quarts raspberries at $0.80/quart = $6.00. All other ingredients cost a total of $0.45. At $0.45 x 10 gallons = $4.50. Total direct materials is $6.00 + $4.50 = $10.50.
Direct labor cost is 3min sorting/quart x 6 quarts = 18 min. Labor is paid at $9.00/hr. That breaks down to $0.15/minute. 18min x $0.15 = $2.70. Blending requires 12 minutes of direct labor which is 12 x $0.15 = $1.80. Total direct labor is $2.70 + $1.80 = $4.50.
Packaging cost is $0.41/quart. 10 gallons at 4 quarts/gallon = 40 gallons. 40 gallons x $0.41= $16.40.
Total standard cost = total direct materials + total direct labor + packaging. So $10.50 + $4.50 + $16.40 = $31.40.

Part B. A product’s standard cost is the total of what it should cost to make the product. At the beginning of each month a budget is prepared using standard costs and estimated production quantities. At the end of the month a variance report is prepared to compare the estimated quantity budget with the actual quantities. The variance report shows how well they did at achieving their budgeted goals. A favorable variance will show that actual costs were less than budgeted costs. An unfavorable variance will show that actual costs were more than budgeted costs. With the use of a budget, management can estimate their future costs and cash needs, plan production, schedule employees, coordinate materials purchases, reduce waste, increase production efficiency, and more. Variance reports help managers identify specific areas where they were either over or under budget. This tells the managers what areas they are successful in and what areas may need improvement. These budgets/variance reports may be used to evaluate how well managers are doing. If management is consistently producing unfavorable variances, chances are they will be replaced. It is, after all, management’s responsibility to maintain an efficient and profitable workflow. By breaking down the total variance into pieces, managers can hone in on the exact cause of the variance. Sometimes a favorable variance in one area will create an unfavorable variance in another area. Variances can arise from any number of reasons including: errors in estimating, mismanagement of resources, unforeseen price changes, equipment breakdown, labor problems, poor planning, and shortage of materials. For example, the variance report shows a favorable materials price variance because management purchased cheaper material. However, the material was of inferior quality which led to more wasted material and an unfavorable materials quantity variance. In addition to this, labor efficiency variance was unfavorable due to the increased handling of the wasted material. This is not a sign of efficient and profitable workflow and the responsible party is management. The purpose of budgeting and variances is to give management an effective tool for controlling cost but the system must be continually reviewed and kept up to date. If it is not or if the underlying assumptions are not reliable, the business will not operate effectively. It is management’s responsibility to ensure the continued success of the company.
Part C. Those who practice management accounting and financial management have an obligation to the public, their profession, the organization they serve, and themselves, to maintain the highest standards of ethical conduct. In recognition of this obligation, the Institute of Management Accountants has disseminated the following standards of ethical conduct for those who practice management accounting and financial management. These ethical standards consist of: competence, confidentiality, integrity, objectivity. According to Accounting For Management (2011), these standards are defined as: * Competence * Maintain an appropriate level of professional competence by ongoing development of their knowledge and skills. * Perform their professional duties in accordance with relevant laws, regulations, and technical standards. * Prepare complete and clear reports and recommendations after appropriate analysis of relevant and reliable information. * Confidentiality * Refrain from disclosing confidential information acquired in the course of their work except when authorized, unless legally obligated to do so. * Inform subordinates as appropriate regarding the confidentiality of information acquired in the course of their work and monitor their activities to assure the maintenance of that confidentiality. * Refrain from using or appearing to use confidential information acquired in the course of their work for unethical or illegal advantage wither personally or through third parties. * Integrity * Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict. * Refrain from engaging in any activity that would prejudice their ability to carry out their duties ethically. * Refuse any gift, favor, or hospitality that would influence or would appear to influence their actions. * Refrain from either actively or passively subverting the attainment of the organization’s legitimate and ethical objectives. * Recognize and communicate professional limitations or other constraints that would preclude responsible judgment of successful performance of an activity. * Communicate unfavorable as well as favorable information and professional judgments or opinions. * Refrain from engaging in or supporting any activity that would discredit the profession. * Objectivity * Communicate information fairly and objectively. * Disclose fully all relevant information that could reasonably be expected to influence and intended users understanding of the reports, comments, and recommendations presented.

Theresa Adams, TasteeFruits cost accountant, has a friend who owns a berry farm. Theresa’s berry farm friend has been losing money in recent years. But recently, because of good crops, has an over stock of berries. Since the price of berries has dropped to $0.50 per quart, Theresa has arranged for TasteeFruit to purchase her friends raspberries at $0.80 per quart. By doing this, Theresa hopes to help her friend’s berry farm become profitable again. Unfortunately, Theresa has broken the Institute of Management Accountants Code of Ethics.
First we will look at competence. Theresa has the responsibility to purchase the best possible materials at the lowest available prices. However, she did not do this. Theresa chose to use her friend for supplies instead of searching for other berries that might be of better quality and of a cheaper price. Next we will look at confidentiality.
Theresa should have refrained from giving Wakefield confidential financial information. However, Theresa supplied Wakefield with the cost of labor, materials, and packaging costs thus, breaking the confidentiality code of ethics. Next is integrity.
Theresa is not supposed to purchase materials from a costlier source for whatever personal consideration she may have. According to the Institute of Management Accountants Code of Ethics, Theresa should “avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict.” However, Theresa purchased the berries from her friend even though she knew she was paying a higher price. Last is objectivity.
Theresa should not have used subjective information to award the contract for the purchase of raspberries to a source that is more costly than others. In addition, Theresa did not disclose all relevant information and did not communicate information fairly or objectively thus, breaking the objectivity code of ethics.

Problem Set 2.

References
Accounting For Management. (2011). Code of Conduct for Management Accountants. Retrieved from http://www.accountingformanagement.com/code_of_conduct_for_management_a.htm
University of Phoenix. (2011). Atlantico, Inc. Retrieved from University of Phoenix, FIN/540 website
University of Phoenix. (2011). TasteeFruit Company. Retrieved from University of Phoenix, FIN/540 website