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.
Garrison, R., Noreen, E., & Brewer, P. (2014). Managerial accounting (15th ed.). Columbus, OH: McGraw-Hill Education.
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.
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