Reference no: EM13952779

CASE: Ethics and Possible Dysfunctional Consequences of Managing to Standards

Road Gear manufactures accessories for road and mountain bicycles. The market for cycling accessories is very competitive, so Road Gear uses a standard costing system to control costs. The day-to-day management of each major line of accessories is the responsibility of a product line manager. These managers are responsible for all major production decisions, including purchasing direct materials, hiring and training production staff, scheduling production, and quality inspections. Monthly performance reports are prepared showing variances for direct materials, direct labour, variable overhead, and fixed overhead for each product line. The performance reports are prepared and distributed five business days after month-end and are reviewed at a monthly meeting attended by all of the product line managers, the vice-president of manufacturing, and the chief financial officer. The product line managers are responsible for explaining all significant unfavourable variances each month, and their annual performance review is based in part on how well they manage actual costs relative to the standard costs for their products. The performance reviews affect the managers' annual merit pay increases and bonus.

One of Road Gear's product lines is a high-quality bicycle computer, the Speed Tracker, that records speed, distance, time, cadence, and a variety of other metrics. Dan Roth is the product line manager for the Speed Tracker and has been with Road Gear for only about 14 months. Prior to joining the company, Roth worked at one of Road Gear's main competitors as a production foreman. Roth's first fiscal year at Road Gear was not very successful. Due to a variety of factors, the monthly variances for the Speed Tracker, particularly those for direct materials and direct labour, were unfavourable the majority of months. Even though Road Gear uses practical standards, Roth felt that the standard prices and quantities for direct materials, and the standard rates and hours for direct labour, were too tight. Moreover, increases in direct material costs during the year made matters worse, and as Roth repeatedly pointed out during the monthly meetings, he had no control over the prices charged by suppliers. Senior management was not convinced by Roth's explanations, so his merit pay increase was well below that of the average given to the other product line managers; his annual bonus was equally low.

In the current fiscal year, Roth decided to take a more active role in managing production costs for the Speed Tracker. He found a cheaper microprocessor, the Zip, for the Speed Tracker that cost 20% less per unit than the previous processor, the Zap, which was used in last year's model. Although Roth knew that the Zip was of lower quality and considerably less reliable than the Zap, he figured the trade-off was worth it since it would result in a favourable price variance for the Speed Tracker and would have no impact on the quantity variance. Moreover, since the causes of favourable variances typically weren't discussed at the monthly meetings, Roth was pretty sure he wouldn't have to explain the price-quality trade-off he had made. Roth also began hiring less-experienced production employees in an effort to eliminate the unfavourable labour rate variance for the Speed Tracker. Although the quality of workmanship was lower with these less-experienced workers and they took longer to produce each unit, the unfavourable labour efficiency variance was more than offset by the favourable rate variance. Roth was pleased with his performance for the first three months of the current year. His variances for direct materials and direct labour were favourable in total, and senior management seemed satisfied that he was doing a better job managing costs. Although the number of Speed Trackers being returned under warranty was up nearly 15% over the same period last year, Roth attributed this to random events that likely wouldn't recur over the remaining months of the year.

Required:

1. Were the actions taken by Roth in the current fiscal year to improve his performance on direct materials and direct labour costs ethical? Explain.

2. What are some longer-term consequences of Roth's behaviour for Road Gear?

3. What steps could senior management at Road Gear take to reduce the type of behaviour exhibited by Roth?