Posted: October 9th, 2016

Why doesn’t Starling its policy of never changing standards after the fiscal year begins?

Before Starling’s fiscal year begins, management estimates that magna45 will have a standard price of $4 per gallon and zelon will have a standard price of $5 per gallon.
The manager in charge of producing zurtan has decision-making authority to alter the mix of magna45 and zelon used to produce zurtan and is evaluated and rewarded based on two criteria: meeting delivery schedules of zurtan (including quantities and quality specifications) and materials quantity variances of magna45 and zelon.
Required:
a. Before Starling’s fiscal year begins, determine the cost-minimizing (standard) quantities of magna45 and zelon per batch of zurtan.
b. Soon after the fiscal year begins, the price of magna45 falls to $3 per gallon and the price of zelon rises to $7 per gallon. What are the efficient (cost-minimizing) quantities of magna45 and zelon that Starling should use to produce a batch of zurtan?
c. Starling has a policy of never changing standards during the year. Standard prices and standard quantities are changed only before the next fiscal year begins. What quantities of magna45 and zelon will the zurtan production manager choose after the price of magna45 falls to $3 per gallon and zelon rises to $7 per gallon?
d. Why doesn’t Starling its policy of never changing standards after the fiscal year begins?