3. Why did Superior improve profitability during the period January 1 to June 30, 2005? How useful was the data in Exhibit 4 for the purpose of this analysis?
As we know from the case, the Superior is implementing the standard cost system which was introduced in early 2005---“Next year’s standard costs were last year’s actual per unit costs adjusted for anticipated cost changes”. By looking at Exhibit 2 and Exhibit 4, we could compare the level of all the costs under the items. The applicable way is to focus on “Variances” which indicate the degrees of changes of all the direct and indirect costs between 2004 & 2005. In addition, the mark of “+” indicates favorable and positive improvement and the mark of “-“indicates unfavorable and negative declines. Therefore, we could obviously observe the major changes in the company are mainly Rent (+259), Indirect Labor (+213) and Depreciation (+642), others factors remain comparatively small different from last years. We could thus conclude that these 3 factors are the main reasons that enabled Superior to improve profitability.
Q4: Why is it Important that Superior has an effective cost system? What is your overall appraisal of the Company’s cost system and its use in reports to management? List the strength and weaknesses of this system and its related reports for the purposes management uses the system’s output. What recommendations, if any would you make to Waters regarding the company’s cost accounting system and its related reports?
An effective cost system is the essential and fundamental determinants to enable the company to have a reasonable assessment and prediction of cost structure. The more scientific the cost system is, the more reliable the decisions and strategy the senior managers and executives of the company would be able to establish for the business.
The second recommendation for the cost system is: In order to have a more accurate method to assess the actual costs of each product that...
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