Best Moulding is a large manufacturer of wood picture frame moulding. The company operates distribution centers in Dallas and Philadelphia. The distribution centers cut frames to size (called “chops”) and ship them to custom picture framers. Because of the exacting standards and natural flaws of wood picture frame moulding, the company typically produces a large amount of waste in cutting chops. In recent years, the company’s average yield has been 78% of length moulding. The remaining 22% is sent to a wood recycler. Best’s performance-evaluation system pays its distribution center managers substantial bonuses if the company achieves annual budgeted profit numbers. In the last quarter of 2014, Stuart Brown, Best’s controller, noted a significant increase in yield percentage of the Dallas distribution center, from 76% to 87%. This increase resulted in a 6% increase in the center’s profits. During a recent trip to the Dallas center, Brown wandered into the moulding warehouse. He noticed that much of the scrap moulding was being returned to the inventory bins rather than being placed in the discard pile. Upon further inspection, he determined that the moulding was in fact unusable. When he asked one of the workers, he was told that the center’s manager had directed workers to stop scrapping all but the very shortest pieces. This practice resulted in the center over reporting both yield and ending inventory. The overstatement of Dallas inventory will have a significant impact on Best’s financial statements.
1. What should Brown do? You may want to refer to the IMA Statement of Ethical Professional Practice, page 18.
2. Which lever of control is Best emphasizing? What changes, if any, should be made?