week 6 - Case 10-31 This case may be difficult for some...

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Case 10-31 This case may be difficult for some students to grasp since it requires looking at standard costs from an entirely different perspective. In this case, standard costs have been inappropriately used as a means to manipulate reported earnings rather than as a way to control costs. 1. Lansing has evidently set very loose standards in which the standard prices and standard quantities are far too high. This guarantees that favorable variances will ordinarily result from operations. If the standard costs are set artificially high, the standard cost of goods sold will be artificially high and thus the division’s net operating income will be depressed until the favorable variances are recognized. If Lansing saves the favorable variances, he can release just enough in the second and third quarters to show some improvement and then he can release all of the rest in the last quarter, creating the annual “Christmas present.” 2. Lansing should not be permitted to continue this practice for several reasons. First, it distorts the quarterly earnings for both the division and the company. The distortions of the division’s quarterly earnings are troubling because the manipulations may mask real signs of trouble. The distortions of the company’s quarterly earnings are troubling because they may mislead external users of the financial statements. Second, Lansing should not be rewarded for manipulating earnings. This sets a moral tone in the company that is likely to lead to even deeper trouble. Indeed, the permissive attitude of top management toward the manipulation of earnings may indicate the existence of other, even more serious, ethical problems in the company. Third, a clear message should be sent to division managers like Lansing that their job is to manage their operations, not their earnings. If they keep on top of operations and manage well, the earnings should take care of themselves. 3. Stacy Cummins does not have any easy alternatives available. She has already taken the problem to the President, who was not interested. If she goes around the President to the Board of Directors, she will be putting herself in a politically difficult position with little likelihood that it will do much good if, in fact, the Board of Directors already knows what is going on. On the other hand, if she simply goes along, she will be violating the “Objectivity” standard of ethical conduct for management accountants. The Home Security Division’s manipulation of quarterly earnings does distort the entire company’s quarterly reports. And the Objectivity standard clearly stipulates that “management accountants have a responsibility to disclose fully all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports,
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comments, and recommendations presented.” Apart from the ethical issue, there is
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week 6 - Case 10-31 This case may be difficult for some...

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