Jams and Jellies, Inc., uses a standard cost system to track inventories and cost of goods sold. The blueberry factory that produces blueberry jams and jellies increased its standard product costs at the beginning of the fourth quarter of its operations for the current year. At the end of the year, the blueberry factory had a large favorable standard cost variance account balance. Buck, the manager of the blueberry factory, receives a large bonus based on the annual factory profits.

Buck has told Sheila, the factory accountant, to close the favorable variance account to Cost of Goods Sold. Sheila remembers that materials variance account balances should be allocated between the Inventory accounts and the Cost of Goods Sold account. However, Buck says that, although the total variance might seem material for the factory, in the grand scheme of the entire company the blueberry factory total variance is not material and Sheila should do as he has suggested.

Instructions

a. Why do you think Buck wants to close the entire variance balance to Cost of Goods Sold? If the variance account balance is closed to Cost of Goods Sold, will the ending finished goods inventory be overstated or understated?

b. Consult the Institute of Management Accountants's (IMA) Web site at www.imanet.org and select "About IMA" to search the "Ethics Center." Find the IMA "Statement of Ethical Professional Practice" and read the Resolution of Professional Conflict. Based on your reading, what do you think Sheila should do?