Individual Summary Project
Managerial Finance and Accounting
12/04/2014

Summarize situation at Merced Home Products: Stacy Cummins, a newly hired controller, was concerned about some information she has come across at the Home Security Division of Merced Home Products, Inc. She has found that the past several years of quarterly income statements were adjusted to make each successive quarter increase its profits, resulting in total annual profit which exceeded targeted profit for the year. Stacy also found letters from the company’s external auditors warning top management of the unusual use of standard costs. Stacy had found that the vice president, Preston Lansing, in charge of the Home Security Division, had rigged the standards so there were always large favorable variances. When Stacy brought the subject up with the President of Merced Home Products she was told the company was aware and, as long as the reports were good, that it was okay.
Evaluate how it’s is possible that the standard costs are being “rigged”: Standard costs are used in relation to quantity and cost of inputs used in manufacturing goods or services. Lansing rigged the standard costs by saving up the favorable variations that he used to create a smooth pattern of growing profits in the first three quarters followed by a very high fourth quarter. Some of the major disadvantages of decision making authority by lower-level managers is they may make decisions without fully understanding the big picture. Also if lower-level managers make their own decisions independently, coordination maybe lacking. Another major disadvantage that could by why Lansing rigged the standard cost is he may have been more interested in increasing the size of his department and wanting more power within the company, increasing the departments effectiveness he would gain that power so it’s possible that Lansing