Answer to Question #177327 in Management for Lai Kwun Kwan

Question

The scenario described here, while placed in the context of a fictitious enterprise, is based on an actual situation that occurred at NuTone Housing Group, which at the time was a subsidiary of Scoville, Inc.* To set the stage, consider these facts about the standard-costing system in place at Shrood Division, a subsidiary of Gigantic Enterprises, Inc. Shrood Division manufactures a wide range of electric household products, such as lighting, fans, water pumps, and security systems. The division manufactures approximately 10,000 products, made from over 70,000 components.

Answer 1

The correct answer is;Tom Cleverly has run the division in what he calls a hands-on manner for over a quarter century. When Shrood Division was acquired by Gigantic Enterprises a decade ago, Cleverly was at first unhappy with the merger, but it soon became apparent that Gigantic’s top management would let him run the business the way he was used to running it. Three aspects of Cleverly’s management style are noteworthy. First, he insists on being involved in all major pricing decisions; he’s not a delegator. Second, he has developed a second-level management that is loyal and supportive of his approach. Third, he has refused to lower the direct-labor time standards for years, even though many productivity improvements have been made. At present, the actual direct-labor times are on average only about a third of the standard times. Moreover, since production overhead is applied on the basis of direct labor, both the standard direct-labor and the standard overhead costs are inflated relative to actual costs.