AGR Company manufactures accessories for road and mountain bicycles in Kamloops. The market for cycling accessories is very competitive, so the company uses a standard costing system to control costs.

The day-to-day management of each major line of accessories is the responsibility of a product line manager. These managers are responsible for all major production decisions, including purchasing direct materials, hiring and training production staff, scheduling production, and quality inspections. Monthly performance reports are prepared showing variances for direct materials, direct labour, variable overhead, and fixed overhead for each product line. The performance reports are used for product line managers annual merit pay increases and bonus.

One of the product lines is a high-quality bicycle computer, the Speed Tracker. Roth is the product line manager for the Speed Tracker. In the current fiscal year, Roth decided to take a more active role in managing production costs. He found a cheaper microprocessor, the Zip, for the Speed Tracker that cost 20% less per unit than the previous processor. Although Roth knew that the Zip was of lower quality and considerably less reliable, he figured the tradeoff was worth it since it would result in a favourable price variance and would have no impact on the quantity variance. Roth also began hiring less-experienced production employees in an effort to eliminate the unfavourable labour rate variance. These less-experienced workers took longer to produce each unit. Roth was pleased with his performance for the first three months of the current year. His variances for direct materials and direct labour were favourable in total.

Required:

(1) Were the actions taken by Roth to improve his performance on direct materials and direct labour costs ethical? Explain.

(2) What steps could senior management take to reduce the type of behaviour exhibited by Roth? Explain.