Generally In looking over the past several years of quarterly earnings reports at the Home Security Division, she noticed that the first-quarter earnings were always poor, the second-quarter earnings were slightly better, the third-quarter earnings were again slightly better, and the fourth quarter always ended with a spectacular performance in which the Home Security Division managed to meet or exceed its target profit for the year.
Cummins ran across these letters, she asked the assistant controller, Gary Farber, if he knew what was going on at the Home Security Division. Gary said that it was common knowledge in the company that the vice president in charge of the Home Security Division, Preston Lansing, had rigged the standards at his division in order to produce the same quarterly earnings pattern every year.
According to company policy, variances are taken directly to the income statement as an adjustment to cost of goods sold.
Favorable variances have the effect of increasing net operating income, and unfavorable variances have the effect of decreasing net operating income.
Lansing had rigged the standards so that there were always large favorable variances. Company policy was a little vague about when these variances have to be reported on the divisional income statements.
Financial reporting regulations forbid carrying variances forward from one year to the next on the annual audited financial statements, so all of the variances must appear on the divisional income statement by the end of the year. Should Preston Lansing be permitted to continue his practice of managing reported earnings?
What should Stacy Cummins do in this situation? Accounting queston how to rig standard cost for favorable variances? Here is my question, A VP of a company is rigging standard cost each year to show a large favorable variance. How does he do that? In the first quarter earnings are poor, a little better in second and third quarter and really great in the fourth quarter.
How is he doing this? Thanks for any help. June 19, Total points: When the products are run at a lower cost than the standard, then this produces a favorable variance. The COGS and variance should net to the correct cost though this is the reason the system creates the variance.
The bigger problem here is that any inventory is likely to be overvalued because of wrong standards.
Finished goods inventory is valued at the standard cost. So if there is a lot of inventory at an inflated cost, then the COGS is being reduced on the income statement too much because of this. I would say he has been building inventory, more and more each quarter.Case Revenue. 1 January Source(s): www.
cost-accounting-info. com Standards Rigging Standards Case /Rigging Standards 1) How did Preston Lansing Probably ‘rig’ the standard costs-are the standards set too high or too low? Explain The standards are . How should the $25 Referral Credit be recorded in Runway’s Income Statement — as a reduction of revenue or as a marketing expense?
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