Problem:
Delma Company manufactures a variety of products in a variety of departments, and evaluates departments and departmental managers by comparing actual cost and output relative to the budget. Departmental managers help create the budgets, and usually provide information about input quantities for materials, labor, and overhead costs. Wert Mimble is the manager of the department that produces product Z. Wert has estimated these inputs for product Z:
Input Budget Quantity per Unit of Output
Direct material 4 pounds
Direct manufacturing labor 15 minutes
Machine time 12 minutes
The department produces about 100 units of product Z each day. Wert's department always gets excellent evaluations, sometimes exceeding budgeted production quantities. Each 100 units of product Z uses, on average, about 24 hours of direct manufacturing labor (four people working six hours each), 395 pounds of material, and 19.75 machine-hours. Top management of Delma Company has decided to implement budget standards that will challenge the workers in each department, and it has asked Wert to design more challenging input standards for product Z. Wert provides top management with the following input quantities:
Input Budget Quantity per Unit of Output
Direct material 3.95 pounds
Direct manufacturing labor14.5 minutes
Machine time 11.8 minutes
Discuss the following:
Required
1. Are these standards challenging standards for the department that produces product Z?
2. Why do you suppose Wert picked these particular standards?
3. What steps can Delma Company's top management take to make sure Wert's standards really meet the goals of the firm?