Question

Custom Furniture, manufacturer of handmade furniture, uses standard accounting for the company. Standards are developed annually based on input from production workers and supervisors. The supervisor of the table department has approached several employees that work for him and suggested that the employees overestimate the amount of materials by 20% and labor by 30% involved in producing certain new tables. He states that it is better to overestimate than underestimate costs as the product has never been manufactured in quantity before and it is uncertain what the actual materials and labor will be. In addition, he states that this would result in any variances being favorable to the department. The employees are not sure what estimates they should discuss with the accounting department. The accounting department wants accurate input that it will adjust for uncertainty,

Question: How would you advise the employees? What ethical issues are involved?

Answer 1

Ethics means doing the morally right thing. In this scenario, I would advise the epmloyees to come up with the best possible estimate for material and labor which shall be required based on their expertise and past experience in the industry. I would not at all suggest giving an inflated estimate just because they will be easier to achieve.

An employee should always place the organization before personal benefit. In this case, if an inflated standard is given for material and labor, the budget of the company will be skewed. The accounting department shall be misled as they do not have the expertise to ascertain the cost themselves. Further, even the accounting department is going to adjust for uncertainty. Thus, giving a wrong estimate is unethical.