Question

Discussion: Overhead variances & financial goals

We have spent the last few chapters analyzing variances from the static budget. Analyzing variances from budget is important to hold managers accountable for helping a company meet its performance objectives. Speculate on ways that managers can manipulate manufacturing data such as direct labor, direct material, and overhead to meet or exceed target budgets. Understanding that these measurements help organizations meet short-term performance goals, propose at least two non-financial measures that should be part of the goals to ensure long term financial performance of a company.

Answer 1

Management can manipulate data in many ways, which include:

1. Manipulating / adjusting price of inventory in order to cover the quantity differences/shortages. For example, if there are 6 units at the rate of 50$, changing price from 50$ to 60$ to cover the shortage of a unit can occur.
2. Manipulating quantities / counts/ usage of material
3. Manipulation of obsolete stock
4. Manipulating the valuation of inventory and cost of goods sold
5. Changes in valuation methods of inventory can manipulate the results
6. The production labour hours may be increased or reduced in order to manipulate results
7. Managers may manipulate the production records leading to a higher or lower overhead absorption rate
8. Maintenance of two sets of records, one for actual and second one for fabricated records

Some non-financial measures to ensure long term objectives are:

1. Implementing checks in each process and recording of each process
2. Audit at regular intervals by external authorities
3. Strengthening the internal control systems in the enterprise so that malpractices may be blocked or reported at the point of their occurence itself
4. Create healthy competition in the organisation and implement achievable targets and incentives