Question

For apparel manufacturers, its raw material costs can rise for numerous and often uncontrollable reasons. This, in turns, has a negative impact on the company and consumers. For example, severe weather or increased fuel cost can impact the supply and cost of needed materials. Also, if farmers or others who grow the needed raw materials decide to grow other products, the company’s supply chain may be interrupted.

A standard is a benchmark for measuring performance. Standards are found everywhere. Standards are also widely used in managerial accounting where they relate to the quantity and acquisition price of inputs used in manufacturing goods or providing services. Quantity standards specify how much of an input should be used to make a product or provide a service. Price standards specify how much should be paid for each unit of the input. If either the quantity or acquisition price of an input departs significantly from the standard, managers investigate the discrepancy to find the cause of the problem and eliminate it. The standard quantity per unit defines the amount of direct materials that should be used for each unit of finished product, including an allowance for normal inefficiencies, such as scrap and spoilage. The standard price per unit defines the price that should be paid for each unit of direct materials and it should reflect the final, delivered cost of those materials.

You are the executive responsible for overseeing the Burberry Women’s Sportswear and Accessories Department. Several events have transpired with the suppliers of raw materials that may adversely impact the supply chain. There has been severe weather in Peru, which is where some of the raw material comes from to manufacture apparel products. Fuel prices have risen in several countries where you obtain material for the synthetic fabrics. Several of the ranches where you purchase material for your leather goods have reduced the size of their herds. You’ve been asked to prepare a report for the CEO on the impact of these events on the cost of raw materials as well as the operational and financial implications for the Woman’s Sportswear and Accessory Department. You must also propose the best course of action in light of these events. This might include maintaining existing sales prices and consequently operate with lower margins; pass the cost increases along to customers in the form of higher prices; lower the raw material costs; or consider alternative products. In order to formulate your response, you will want to carefully consider the problem, examine the pros and cons of each alternative under consideration, and document your recommendations using sound arguments that are well supported, properly vetted, and logically presented. It is important that management carefully consider any potential ethical implications associated with their stated position. If there are any potential ethical concerns associated with your position, they should be identified and discussed in the final recommendation.

Answer 1

Case Analysis –

Nature of Company – Apparel Manufacture

Present issue – Increase in raw Material cost which i quite high and uncontrollable . Fuel cost increase supply and cost of needed material

Use – Standard used in managerial accounting where they relates to the Quantity and acquisition price input used in manufacture goods and providing service

Quantity Standard specify quantity how much input should be used to make a Product

Price standard specify how much price should be paid for each unit of the input

Now after setting standard relates to Quantity and Price , we need to do variance with Actual number and make a look into any major variance. Manager has to investigate this difference .

Standard Quantity per unit define the amount of direct material should be used for each unit of finished product including an normal allowance such as scrap + Spoilage

Basically company needs to implement proper Standard costing system in relates to material price , Quantity and set measure with Actual performance and determined variance analysis . On the basis of variance analysis , need to review any cost overrun in the process mainly due to Pricing pressure and Quantity burdened

At present Process , couple of area are really concerned like :

Increase in Fuel Price in several countries from where company obtain raw material . this definitely create pressure on material input cost and increase in base price . manufacture price

Unit – Woman Sportswear and Accessory Department

As a Management Accountant , from the above data noticed that at present Unit manufacturing cost is under pressure , prising pressure , not able to transfer price to Customer so tremendous pressure on Margin

Management Accountant has to look into Fuel cost and source of acquisition of Fuel . They need to find out oter alternative of Fuel if possible and ensure quality of manufactured product .

Need to implement proper Standard costing system in the organization and review the same in details . Need more negotiated input price and control overleajage of cost overrun,

Need to educated all Operation department team about the process , standard etc .

Implement proper standard costing system and strictly monitor the same will help :

Improve cost control

More useful information towards managerial planning

More relevant way Inventory valuation

Cost savings amd possible reduction in production cost