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27/08/2022
CH26 An Ethical Question Involving Standard CostsC 1. Taylor Industries, Inc., develops standard costs for all its direct materials,direct labor, and overhead costs. It uses these costs to price products, cost inventories,and evaluate the performance of purchasing and production managers. Itupdates the standard costs whenever costs, prices, or rates change by 3 percent ormore. It also reviews and updates all standard costs each December; this practiceprovides current standards that are appropriate for use in valuing year-end inventorieson the company’s financial statements.Jody Elgar is in charge of standard costing at Taylor Industries. On November30, she received a memo from the chief financial officer informing her thatTaylor Industries was considering purchasing another company and that she andher staff were to postpone adjusting standard costs until late February; they wereinstead to concentrate on analyzing the proposed purchase.In the third week of November, prices on more than 20 of Taylor Industries’direct materials had been reduced by 10 percent or more, and a new labor unioncontract had reduced several categories of labor rates. A revision of standard costsin December would have resulted in lower valuations of inventories, higher costof goods sold because of inventory write-downs, and lower net income for theyear. Elgar believed that the company was facing an operating loss and that theassignment to evaluate the proposed purchase was designed primarily to keep herstaff from revising and lowering standard costs. She questioned the chief financialofficer about the assignment and reiterated the need for updating the standardcosts, but she was again told to ignore the update and concentrate on the proposedpurchase. Elgar and her staff were relieved of the evaluation assignment inearly February. The purchase never materialized.Assess Jody Elgar’s actions in this situation. Did she follow all ethical paths tosolving the problem? What are the consequences of failing to adjust the standardcosts?
Standard Cost:Direct Material + Direct Labour + Overhead CostChange in Standard Cost if cost changes + 3%. Review in every December to value theinventory. It uses this cost to price, cost of…
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