Reference no: EM133004032

Standard Costing, Ethical Behaviour, Usefulness of Standard Costing

1. 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.
2. 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 negative. The supplier had a reputation for making the first two or three deliveries on schedule but being unreliable thereafter. 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 percent less than what normal sources provided.
3. 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 six 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:

Problem 1. Do you agree with Pat's decision? Why or why not? How important was Pat's assessment of his risk in the decision? Should it be a factor?

Problem 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?