Case Standard Costs
The standard costs at the Home Security Division set by its vice president Preston Lansing are set too high, to create favorable variances when production turns out a lower product cost. Because the company closes variances only to the cost of goods sold account, these directly affect income and earnings. The vagueness in company policy about when to recognize these variances allow Lansing to window-dress earnings by applying the variances to the cost of goods sold account on his own volition during the interim period, and not during the period on which they arise.
This use of standard costing is laced with intent to misinform users of the interim divisional financial statements. Lansing’s management of reported earnings is a case of trying to mislead users by selectively reporting relevant financial information. He cannot continue to manage the division’s earnings in this manner.
Stacey Cummins can choose to report the matter herself to the board of directors, because she already tried to explain the situation to the president. The matter should always be resolved with somebody higher than the people who concern it directly, in this case Lansing. In any case, Cummins cannot choose not to act on this, because this is clearly a violation of sound accounting principles. Standard costs are very useful in many situations, including preparing budgets and reducing clerical labor among other things (Carter 18-2). The application of low standards to accumulate favorable variances and influence earnings is not one of these uses. The use of varied accounting tricks to intentionally mislead users of financial statements should never be an accepted practice, whatever its form takes.
R E F E R E N C E S
Carter, William K. Cost Accounting. 14th ed. Custom Publishing, 2005.