PETERSEN POTTERY

This case is set in rural West Virginia in 1980 in the $450 million per year “vitreous clay fixtures” industry.
There are 70 firms in the industry and Peterson is somewhere in the middle. The case deals with the
need for formal cost control systems.

Just outside of Elkins, West Virginia, high in the Appalachian Mountains, Clive Petersen had been
making ceramic bathroom fixtures (sinks, toilets and bathtubs) since 1960. Petersen fixtures had
become known over the years for their distinctive custom features, their high quality, and their long
life. Petersen Pottery had grown from a two-man operation in 1960 to the present group of 20 master
potters located in two large old warehouses, converted from World War II storage depots. By 1980
Clive’s business had expanded to the point where he felt he must institute some type of formal,
systematic controls over his costs. His banker was more and more concerned about the lack of any
kind of modern cost accounting system as the loan balances kept growing to fund Clive’s expansion
and seasonal operations.
The manufacture of ceramic “sanitary ware” consists of two processes: “green” molding and glazing,
each of which involves a four-day kiln cycle. Raw clay is first packed into “plaster-of-Paris” molds
where it is allowed to dry before it is baked in a kiln to harden. In the second stage, the fixture is
coated with a glaze mixture to give it its color and characteristic smooth finish. The fixture is then
baked again (fired) to harden and fix the glaze to the day. The kiln time is as follows:
Green Molding Cycle Glazing Cycle
Drying 1 day 1 day
Firing 1 day 1 day
Cooling 2 days 2 days

The finished product is then shipped to various wholesale outlets around the East Central States
region. The molding and firing of ceramics, although not highly complex, requires an experienced
potter to assure the quality of the product. Excessive heat or excessive time in the kiln can ruin a
fixture. The mixing and application of the glaze also requires a significant amount of skill. However,
too much time cannot be spent on the molding and glazing processes because delays can cause
bottlenecks in the hole production process.
The need for better cost control, coupled with a need for better control over production scheduling
to meet the increases in demand, led Clive Petersen to adopt a standard cost system. After extended
discussion with his most experienced master potters, Clive and his new cost accountant arrived at
the following cost standards for a toilet, one of the high-volume products:

Materials
Raw Clay 25 lb @ $0.95/lb $ 23.75
Glazing Mix 5 lb @ $0.75/lb 3.75
Direct Labor
Molding 1 hr @ $15/hr* 15.00
Glazing 0.5 hr @ $15/hr* 7.50
Manufacturing Overhead Costs: Absorbed
@ $ 5 per Fixtures 5.00**
Total per fixtures $55.00

*) Petersen paid wages of about twice the average for “stone and clay workers” because he wanted only top-quality products.
**) Normal volume per month for overhead allocation purposes was assumed to be 1,200 toilets.
The estimated monthly manufacturing overhead allocation to this product was $ 1.94 per unit plus $ 3,672 of fixed cost.
ANALYSIS OF OPERATIONS

After 6 months of operations using the new cost system Petersen was disturbed over the lack of
attention paid to the standards. He felt that the potters were just too set in their ways to pay any
attention to the “confusing” new system. As one of the potters observed, “I have been making these
fixtures a lot longer than these new ideas had been around, and I don’t see how a bunch of numbers
that some hot-shot accountant puts together are going to help me make any better toilets.” The
result was that although the standards existed, they were seldom met.
In reviewing the June production results, the following actual costs were noted in connection with
manufacturing 1,145 toilets:

Materials Purchased
Clay 30,000 lb @ $ 0.92/lb
Glaze 6,000 lb @ $ 0.78/lb
Materials Used
Clay 28,900 lb
Glaze 5,900 lb
Direct Labor
Molding 1,200 hr @ $ 15.25/hr
Glazing 600 hr @ $ 15.00/hr
Overhead assigned to toilets: $6,100 ($2,300 variable cost and $3,800 fixed cost)
The sales manager was unhappy that production was $5 units below plan. The cost accountant was
unhappy about continuing unfavorable variances. Before proceeding with further analysis, Petersen
met with his most experience master potter, Jim Sedgefield, to discuss the variances from the
standard. He was seriously considering implementing a new and much faster “pressure casting”
molding system to replace the existing manual system. When Sedgefield arrived, Clive explained
the problem: “Jim, you agreed when we set them up that the standards are reasonable and yet you
never meet them. It looks like we will have unfavorable variances again this month as well as more
missed shipping dates.” Sedgefield was not impressed. “Well, Clive,” he said, “I never have
understood this system at all. Why don’t you asked that fast-talking accountant to explain the
variances? That new brand of clay you said was going to be cheaper for us. Do you want me to
make lots of toilets or goof toilets?”

Questions:
1. Analyze the variances for the month using whatever format you like.
2. What conclusions are suggested regarding cost performances for the month?
3. What suggestions do you have for Mr. Petersen regarding his new standard cost system?