Question

Pat James, the purchasing agent for a local plant of the Oakden Electronics Division, was considering the possible purchase of a component from a new supplier. The component's purchase price, $0.90, compared favorably with the standard price of $1.10. Given the quantity that would be purchased, Pat knew that the favorable price variance would help to offset an unfavorable variance for another component. By offsetting the unfavorable variance, his overall performance 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 position at division headquarters at a significant salary increase.

Purchase of the part, however, presented Pat with a dilemma. Consistent with his past behavior, 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 questionable 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 6 months. He saw little personal risk associated with a decision to purchase the part from the new supplier. By the time any problems surfaced, they would belong to his successor. With this rationalization, Pat decided to purchase the component from the new supplier.

Required:

1. 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?

2. 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?

3. 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?

4. 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:

   • What are the major criticisms of standard costing?

   • Will standard costing disappear, or is there still a role for it in the new manufacturing environment? If so, what is the role?

   • Given the criticisms, can you explain why its use continues to be so prevalent? Will this use eventually change?

1. In preparing your paper, the following references may be useful; however, do not restrict your literature search to these references. They are simply to help you get started.

   • Robin Cooper and Robert S. Kaplan, “Activity-Based Systems: Measuring the Costs of Resource Usage,” Accounting Horizons (September 1992): 1–13.

   • Forrest B. Green and Felix E. Amenkhienan, “Accounting Innovations: A Cross-Sectional Survey of Manufacturing Firms,” Journal of Cost Management (Spring 1992): 59–64.

   • Bruce R. Gaumnitz and Felix P. Kollaritsch, “Manufacturing Variances: Current Practice and Trends,” Journal of Cost Management (Spring 1991): 59–64.

   • Chris Guilding, Dane Lamminmaki, and Colin Drury, “Budgeting and Standard Costing Practices in New Zealand and the United Kingdom,” Journal of International Accounting, Vol. 33, No. 5 (1998): 569–588.

Answer 1

1.As a business student, I would like to disagree with Pat's decision.The decision took by Pat is on the view of his personal benefit rather than reviewing the benefit of the firm because he is clear that if he choose new supplier the future supply of raw materials might be going to be interrupted and long term negative impact will be hit on the firm's sales as well as on profit.Pat should have understood that business have created various posts and staffed him various authorities for taking decisions benefitting the business.Even when an analysis is made on the personal decison taken by him for his ends.He relied on a supplier who does not have a good track record.Hitting back Pat's view if the new supplier fails to supply the raw materials after signing contract,then it might lead to his elimination in the entity.Further more he should have understood that a faulty decision taken by him might risk the position of the entity in the business environment and thereby risk his livelihood. It is needless to mention that no ones personal ends must a critirea in taking business decisions.If that is the case then no business will have a survival concept.This is why law basically see the owner of the business and business as two distinct persons.

2.Surely I think that the practice of performance based promotion is the cause of Pat's decision to choose a supplier who is not reliable,risking the business existence.The modern business practice is to promote based on a particular period's performance.Surely a rational person employed in the firm should do his maximum since he will get recognised with a higher job profile with a hike in salary.The ways that he may undertook to achieve this may not be ethical to business.Business firms which does have adequate control measures on top keep person's may even risk it's existence with the policy of promotion on performance.It is true that a business firm should recognise the efforts of it's for maintenance of the morale of the employees.However under taking such type of performance based policies the frim may ensure proper controls to check the activities of top managerial level personnels and key personnels who are given with independent authorities to perform activities as per organisational structure.

3.Organizational ethics refers to the rightness of the decisions and behaviors of individuals and the organizations of which they are a part. The definition of Buchholz and Rosenthal (1998) highlights this.Business ethics was in earlier times considered as a moral value that an employee should proccess but now a days,this concept have been changed considerably that business ethics have become one of the key principles while executing decisions.Every employee should adhere with corporate ethical standard that the industry in he works asks him for.

Every company is required to adopt a set of ethical standards that apply to its employees, regardless of their specialty.The ethics of a person should be one of the major preferences when he is staffed with the organization.The organisation should ensure accountability for this ethics.Company may even set up an internal board of ethics to lookk after the decisions made by the employees of the organization.Company should set up a good ethical standards in every sphase at the incorporating phase itself.This will serve as a base for taking decisions for the employees.In future the company may modify its ethical standard so as to fit it's policy.However every should maintain a personal ethics when he is staffed in a position with an authority.He should ensure all decisions he took are in par with the interests of the organisation at large rather than his own personal interest.Ethics not only shrink to the area of decision taking but is a vast term in business.It may include even the day to activities that an employee may perform.