1.developmentof standard cost ;ethical issues: manufacturer
domestic bliss limited manufactures a range of household products in a number of division. Darling division is a small plant that manufactures wooden households item.in January this year. Bert Rivkin, the divisions management accountant, implemented a standard costing system. Rivkin collected information from several people within the company to assist him in developing standards.
One of the darling’s products is a wooden cutting board. its cutting board requires 1.50 meters of timber and 24 minutes of direct labor time to prepare and cut the timber. The cutting boards are inspected after they are cut. because the cutting boards are made of natural wood that has imperfections, one board is normally rejected for each 10 that are accepted.4 rubber footpads are attached to each good cutting board. A total of 30 minutes is required to attach all footpads and to finish each cutting board. The timber for the cutting board costs$7.50 per meter and each footpad costs $0.05 direct labour is paid at the rate of $25 per hour.
The new standard costing system was well received by managers in the darling division and a variance report was produced each week. In June jack smith, the purchasing manager was about to place an order for wood to be used in darling cutting boards. Smith found a supplier who would supply the necessary wood at $7 per meter instead of the standards cost of $7.50.this was very appealing to Smith, since his annual bonus is influenced by any favorable price variance he is able to obtain. Smith is due to be transferred at the end of the year to another division, which manufactures metal kitchen utensils. The transfer is promotion for Smith.
After further discussion with the potential supplier, Smith realize that the wood being offered would not be well-suited for use in cutting boards. Although the wood would not hold a well over time. This particular species of wood, after repeated cycles of getting wet and then drying out would tend to crack. Smith figures that would take about a year for the cutting board to deteriorate, and then darling would be beset with customer complaints.
Smith mulled over the situation for a while and then decided to accept the new suppliers offer. The $ 7 price would help to get him a nice annual bonus, which would go towards the cost of his annual holidays by the time the cutting boards crack and customer started to complain, he would be long gone. Someone else could worry about the problem then, he reasoned. After all he thought people shouldn’t a cutting board to last forever.
Several weeks later, when the invoice for first shipment of wood came through Bert Rivkin noticed the large favorable price variance when he ran into Smith on the golf course, Rivkin congratulated Smith on the purchase. The following conversation resulted:
Rivkin:Thatwas quite a price break on the wood,Jack.how’d you swing it?
Smith:hard negotiating,Bert.its as simple as that.
Rivkin:is it good wood? And how about the supplier Jack,would theu deliver on time?
Smith:This supplier is very timely in their deliveries,I made sure of that.
Rivkin:how about the quality Jack, did u check into that?
Smith: sure I did Bert. Hey what is this an interrogation/I thought we were here to play golf.
Rivkin was left feeling puzzled and concerned by Smiths evasiveness.The next day Rivkin talked to the production manager Amy Wilcox about the concers. Later that day Wilcox raised a issue wit smith .After lenghy and sometimes heated exchange the story came out.
Required:
1.Develop the standard costs for direct material and direct labour of one cutting board.
2.Explain the role of the each of the following people in the developing the standards?
a.purchasing manger
b.production manger
c.management accountant
3.discuss the ethical issues involved in the scenario :
a.Did the purchasing manager, Jack Smith, act ethically?
b.Did the accountant Bert Rivkin,act ethically when he asked about the quality of the wood?
c.Did Rivkin act ethically when he went to the production manger with his concerns?
d.What should Rivkin do now?
You may want to revisit the discussion of ethical conduct in chapter 1, before answer in this questions