3. Scenario : Blue-Corn Foods
At the start of a new year, Rosita Mendez, president of Blue-Corn Foods, Inc., liked to look back over the past year’s
results. She reviewed the income statement with pleasure: Sales were up and costs were down. Operating income
had increased significantly over the year before. Rosita firmly believed that these improvements could be largely
traced to the institution of a standard costing system early last year.
At this time last year, Rosita was also reviewing the previous year’s performance, but was not happy. Sales were
slipping and costs seemed out of control. Quality control had been lacking; more than once, a state government’s
division of weights and measures had fined Blue-Corn Foods for underfilling its bags of “Bluechitos” crispy chips made
from blue corn. Rosita had gone directly to BlueCorn Foods’ controller, Mel Hamilton. Mel had confirmed her
assessment of the need for closer cost and quality control. He explained that a standard cost system could go a
long way toward solving the difficulties that troubled Rosita. A standard cost system determines the price and
quantity standards for materials, labor, and overhead. Then, budgeted costs for labor, materials, and overhead could
be established for each unit produced. Mel pointed out that a standard cost system could give an early warning of
problems in filling the snack bags with the correct weight of chips. Production managers could be held responsible
for meeting the established standards. Rosita agreed that a standard cost system would be a useful cost control
tool, and asked Mel to set up a pilot system for the Bluechitos product line.
A year later, Rosita could see the improvements made possible by a standard cost system. The problem with
underfilling bags was essentially solved. There had been a steep drop in the number of fines levied against the
company. In addition, the Bluechitos line manager was delighted with the help the new price and quantity standards
gave in budgeting for the coming year. In fact, that line was the first to complete its budget for the coming year.
Other line managers noticed and wanted standard costs developed for their lines as well. Rosita made a note to tell
Mel Hamilton to extent the standard costing system to all product lines.
4. What motivated Rosita to implement a more formal cost
control system?
1
Why does a standard cost system provide more detailed
control information?
2
What type of control is being exercised with the use of
standards?
3
How can standards be used to control costs?
4
Questions to Think About
5. Cost Data
Inaccuracy
Improve Quality
Quality Control
Issues
Improve Decision-
making
Declining Sales and
Rising Costs
Enchance Cost
Control
Motivation for Implementing a Standard
Costing System
1
What motivated Rosita to implement a more formal cost control system?
6. More Accurate
based on careful estimates
of costs to be incurred
More Timely
available before production
begins
More Detailed
calculated for each cost
element
Identify Problems
More Quickly
Variances from standards
can quickly identify areas
where problems exist.
Make More Effective
Decisions
More detailed and timely
information allows companies to
make more effective decisions
about pricing, production, and
other strategies.
Operate More
Efficiently
help companies identify and
eliminate waste, thereby
increasing operational efficiency
Superiority of Control Information from
Standard Costing Systems
2
Why does a standard cost system provide more detailed control information?
7. ● Preventive
Setting standard costs and assigning
responsibility to managers for meeting
those standards.
● Detective
Monitoring variances from standards
and investigating significant variances.
● Feedback
Providing information about variances to
managers so they can take corrective
action.
Types of Control Exercised Using Standard
Costing
3
What type of control is being exercised with the use of standards?
8. Cost Reduction
Blue-Corn Foods' production
costs decreased after
implementing the standard
costing system.
Evaluating
Performance
Variances from standards
can be used to evaluate the
performance of managers
and departments.
Setting Budget
can be used as a basis for
setting budgets for future
periods.
Quality Improvement
Blue-Corn Foods' product
quality improved after
implementing the
standard costing system.
Decision-making
Improvement
Blue-Corn Foods was able to
make better decisions about
pricing, production, and other
strategies after implementing
the standard costing system.
Using Standards to Control Costs
4
How can standards be used to control costs?
