Ethics and Standard Cost

Part 1: Service organizations also use standards. Describe what types of standards might be in effect at each of the following types of organizations:

• Hospitals • Law firms • Accounting firms • Auto repair shops • Fast-food restaurants

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For the types of service organizations listed above, should ideal standards or practical standards be implemented? What are the advantages and disadvantages of each? If you were an employee at one of these organizations, which would you prefer and why? Does your answer change if you are the manager in charge of production? Why or why not?

Part 2: Ethics. The Green Gnome Company manufactures lawn and garden concrete and resin statues. It uses a standard costing system for its products. Managers and production personnel are paid bonuses based on attainment of material, labor, and overhead standards. The standards are recommended by a committee that is composed of engineers, production staff, and accountants. The accounting manager, however, has the final say on what the standards will be for each upcoming year.

 

Four years ago, the senior management at Green Gnome adopted a “zero-defects” strategy throughout the organization. As part of the zero-defects strategy, the company has been using ideal standards. Senior management has pointed out that it does not want to build waste into the standards by using practical standards. The adoption of ideal standards has been somewhat problematic at Green Gnome, and there has been a lot of resistance from employees to the ideal standards.

 

Greg Hanes is the accounting manager at Green Gnome and is currently evaluating the material, labor, and overhead standards for the upcoming year. The standards committee has already met and made its recommendations. The standards are, as dictated by senior management, extremely tight and allow for zero waste, breakdowns, or downtime.

 

The plant manager, Sheryl Radison, comes to Greg and asks him to loosen the standards for the upcoming year. The plant manager is upset that the standards are set at a 100% efficiency rate (zero defects). Sheryl points out that everyone’s bonus is on the line if the standards are not met. Some jobs may also be lost if standards are not met. Sheryl feels that the standards are unattainable and are not fair to employees. Sheryl even indicates that Greg’s job might possibly be on the line if another year goes by without standards being achieved. Visit https://en.wikipedia.org/wiki/Cost_accounting for more information.

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Greg gets together with a close friend, Paula Brown, and discusses the matter at length with her. He tells her he feels guilty if the production staff does not get bonuses because of the way that the standards are set. He is also worried about his own job over the long run; it is in his best interests to have a good relationship with the plant manager. The economy is bad, and he does not know how long it would take to get a new job. Greg shows Paula the ideal standards recommended by the committee and then shows her the adjustments that he thinks he could make to help make the standards achievable. Paula agrees that the standards should be adjusted.

Requirements

Using the IMA Statement of Ethical Professional Practice as an ethical framework, answer the following questions:

 

What is (are) the ethical issue(s) in this situation?

What are Greg Hanes’s responsibilities as a management accountant?

Should Greg adjust the standards to a more achievable level in this situation? Support your answer.

Describe another way that Greg could handle this situation that would not violate the IMA Statement of Ethical Professional Practice.

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