Road Gear manufactures accessories for road and mountain bicycles. The market for cycling accessories is very competitive, so Road Gear uses a standard costing system to control costs. The day-to-day management of each major line of accessories is the responsibility of a product line manager. These managers are responsible for all major production decisions, including pur- chasing direct materials, hiring and training production staff, scheduling production, and quality inspections. Monthly performance reports are prepared showing variances for direct materials, direct labour, variable overhead, and fixed overhead for each product line. The performance reports are prepared and distributed five business days after month-end and are reviewed at a monthly meeting attended by all of the product line managers, the vice-president of manufacturing, and the chief financial officer. The product line managers are responsible for explaining all significant unfavourable variances each month, and their annual performance review is based in part on how well they manage actual costs relative to the standard costs for their products. The performance reviews affect the managers’ annual merit pay increases and bonus.
Required:
1. Were the actions taken by Roth in the current fiscal year to improve his performance on direct materials and direct labour costs ethical? Explain.
2. What are some longer-term consequences of Roth’s behaviour for Road Gear?
3. What steps could senior management at Road Gear take to reduce the type of behavior exhibited by Roth?