Comprehensive Variance Analysis with Behavioural Issues

Jan Dan, Inc. (JDI), is a specialty frozen-food processor located in the south eastern
United States. Since its founding in 1992, JDI has enjoyed a loyal local clientele that is
willing to pay premium prices for the high-quality frozen foods it prepares from
specialize drecipes. In the past two years, the company experienced rapid sales growth
in its operating region and had many inquiries about supplying its products on a
national basis. To meet this growth, JDI expanded its processing capabilities, resulting in
increased production and distribution costs. Moving onto the national scene also caused
JDI to encounter pricing pressure from competitors outside its region.
Because JDI wants to continue expanding, Nick Guice, the company's chief executive
officer, engaged a consulting firm to assist in determining JDI's best course of action.
The consulting firm concluded that premium pricing is sustainable in some areas, but if
sales growth is to be achieved, JDI must make price concessions in other areas. Also, to
maintain profit margins, costs must be reduced and more tightly controlled. The
consulting firm recommended the implementation of a standard cost system that would
facilitate a flexible budgeting system to better accommodate the changes in demand that
can be expected when serving an expanding market area.
Recently, Guice met with his management team and explained the consulting firm's
recommendations. Guice then assigned the task of setting standards to his management
team. After the management team discussed the situation with their respective staffs,
the team met to review the matter.
Janie Morgan, purchasing manager, advised that meeting expanded production would
necessitate obtaining basic food supplies from companies other than JDI's traditional
sources. This in turn would entail increased raw material and shipping costs and might
result in lower quality supplies. Consequently, these increased costs will need to be
counter-balanced by reduced costs in the processing department if current cost levels
are to be maintained or reduced.
Dan Walters, processing manager, suggested that the need to accelerate processing
cycles to increase production, coupled with the possibility of receiving lower grade
supplies, could be expected to result in poorer quality and a greater product rejection
rate. Under these circumstances, per-unit labor utilization cannot be maintained or
increased and forecasting future unit labor content becomes very difficult.
Corinne Kelly, production engineer, advised that if the equipment is not properly
maintained and thoroughly cleaned at prescribed daily intervals, it can be anticipated
that the quality and unique taste of the frozen-food product will be affected. Kent
Jackson, vice president of sales, stated that if quality cannot be maintained, JDI cannot
expect to increase sales to the levels projected.
When Guice was apprised of the problems enumerated by his management team, he
advised the team members that if agreement could not be reached on appropriate
standards, he would arrange to have the standards set by the consulting firm and
everyone would have to live with the results.

Required
A. List the major advantages of using a standard cost system.
B. List disadvantages that can result from using a standard cost system.
C. Identify those who should participate in setting standards, and describe the benefits
of their participation in the standard-setting process.
D. Explain the general features and characteristics associated with the introduction and
operation of a standard cost system that make it an effective tool for cost control.
E. What could be the consequences if Nick Guice has the standards set by the consulting
firm?
F. Explain what is meant by variance and variance analysis.
G. Discuss material variances and why they might occur at JDI.