Yvonne Blackstraw, the newly hired controller at Safety Masterminds, Inc., was d
ID: 2465094 • Letter: Y
Question
Yvonne Blackstraw, the newly hired controller at Safety Masterminds, Inc., was disturbed by what she had discovered about the standard costs at the corporate security division. In looking over the past several years of quarterly earnings reports from the corporate security division, she noticed that t first-quarter earnings were always poor, the second quarter earnings were slightly better, the third quarter earnings were again slightly better, and then the fourth quarter and the year always ended with a spectacular performance in which the corporate security division always managed to meet or exceed its target profit for the year. She also was concerned to find letters from the company's external auditors to top management warning about an unusual use of standard costs in the corporate security division.Explanation / Answer
1. Margaret Postol has set the standard cost too high. Actual costs must be much lower than the standard set and that resulted in high positive variances against the standard costs.
2. Margaret used to carry forward the intial three quarters major part of positive variances and used the favorable variances in last quarter to show a huge improved result. Probably she saved the favorable variances so that she can utilize those amounts as per requirement in last two quarters based on actual results.
The setting of standards too high creates favorable variances though the inventory cost would be higher. The target profit % can be achieved by manipulating and adjusting the variances.
3. Yvonne Blackstraw should report this to the audit Committee for their knowledge and suitable action.
To stop such practice , the corporate must create standard opearting procedure for Budgeting and Variance reporting. As variances are huge, the next budget should preferably be zer based to make the standard cost error free. The variances in each month or quarter must be transferred to income statement and only proportionate variance for the inventory amount should be carried forward to the next quarter.
So rationalization of standard cost and SOP for variance accounting should make the financial statements revenue and costs matched to show a true and fair view.
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