Case $10-50$ Standard Costing, Ethical Behavior, Usefulness of Costing

Pat James, the purchasing agent for a local plant of the Oakden Electronics Division, was con$-$

sidering the possible purchase of a component from a new supplier. The component's purchase

price, $$0\mathrm{.}90,$ compared favorably with the standard price of $$1\mathrm{.}10.$ Given the quantity that

would be purchased, Pat knew that the favorable price variance would help to offset an unfavor$-$

able variance for another component. By offsetting the unfavorable variance, his overall per$-$

formance report would be impressive and good enough to help him qualify for the annual

bonus. More importantly, a good performance rating this year would help him to secure a posi$-$

tion at division headquarters at a significant salary increase.

Purchase of the part, however, presented Pat with a dilemma. Consistent with his past behav$-$

ior, Pat made inquiries regarding the reliability of the new supplier and the part's quality.

Reports were basically negative. The supplier had a reputation for making the first two or three

deliveries on schedule but being unreliable from then on$.$ Worse, the part itself was of question$-$

able quality. The number of defective units was only slightly higher than that for other suppliers,

but the life of the component was $25\%$ less than what normal sources provided.

If the part were purchased, no problems with deliveries would surface for several months.

The problem of shorter life would cause eventual customer dissatisfaction and perhaps some loss

of sales, but the part would last at least $18$ months after the final product began to be used. If all

went well, Pat expected to be at headquarters within six months. He saw little personal risk asso$-$

ciated with a decision to purchase the part from the new supplier. By the time any problems sur$-$

faced, they would belong to his successor. With this rationalization, Pat decided to purchase the

component from the new supplier.

Required:

Do you agree with Pat's decision? Why or why not? How important was Pat's assessment of

his personal risk in the decision? Should it be a factor?

Do you think that the use of standards and the practice of holding individuals accountable

for their achievement played major roles in Pat's decision?

Review the discussion on corporate ethical standards in Chapter $1.$ Identify the standards

that might apply to Pat's situation. Should every company adopt a set of ethical standards

that apply to its employees, regardless of their specialty?

The usefulness of standard costing has been challenged in recent years. Some claim that its

use is an impediment to the objective of continuous improvement $($an objective that many

feel is vital in today's competitive environment$).$ Write a short paper $($individually or in a

small group with two or three other students$)$ that analyzes the role and value of standard

costing in today's manufacturing environment. Address the following questions:

a$.$ What are the major criticisms of standard costing?

b$.$ Will standard costing disappear, or is there still a role for it in the new manufacturing

environment? If so$,$ what is the role?

c$.$ Given the criticisms, can you explain why its use continues to be so prevalent? Will this

use eventually change?