CASE 9-27 Ethics and the Manager L LO9-3 Tom Kemper is the controller of the Wichita manufacturing facility of Prudhom Enterprises, Inc. The annual cost control report is one of the many reports that must be filed with corporate headquarters and is due at corporate headquarters shortly after the beginning of the New Year. Kemper does not like putting work off to the last minute, so just before Christmas he prepared a preliminary draft of the cost control report. Some adjustments would later be required for transactions that occur between Christmas and New Year's Day. A copy of the preliminary draft report, which Kemper completed on December 21, follows: Page 493 Wichita Manufacturing Facility Cost Control Report December 21 Preliminary Draft Actual Flexible Spending Results Budget Variances Labor-hours 18,000 18,000 Direct labor $ 326,000 $ 324,000 $2,000 U Power 19,750 18,000 1,750 U Supplies 105,00 99,000 6,000 U Equipment depreciation 343,000 332,000 11,000 U Supervisory salaries 273,000 275,000 2,000 F Insurance 37,000 37,000 Industrial engineering 189,000 210,000 21,000 F Factory building lease 60.000 60,000 Total expense $1,352.750 $1.355.000 $2.250 F Melissa Ilianovitch, the general manager at the Wichita facility, asked to see a copy of the preliminary draft report. Kemper carried a copy of the report to her office where the following discussion took place: Ilianovitch: Wow! Almost all of the variances on the report are unfavorable. The only favorable variances are for supervisory salaries and industrial engineering. How did we have an unfavorable variance for depreciation? Kemper: Do you remember that milling machine that broke down because the wrong lubricant was used by the machine operator? Ilianovitch: Yes. Kemper: We couldn't fix it. We had to scrap the machine and buy a new one. Ilianovitch: This report doesn't look good. I was raked over the coals last year when we had just a few unfavorable variances. Kemper: I'm afraid the final report is going to look even worse. Ilianovitch: Oh? Kemper: The line item for industrial engineering on the report is for work we hired Ferguson Engineering to do for us. The original contract was for $210,000, but we asked them to do some additional work that was not in the contract. We have to reimburse Ferguson Engineering for the costs of that additional work. The $ 189,000 in actual costs that appears on the preliminary draft report reflects only their billings up through December 21. The last bill they had sent us was on November 28, and they completed the project just last week. Yesterday I got a call from Laura Sunder over at Ferguson and she said they would be sending us a inal bill for the project before the end of the year. The total bill, including the reimbursements for the additional work, is going to be . . . Ilianovitch: I am not sure I want to hear this. Kemper $225,000 Ilianovitch: Ouch! Kemper: The additional work added $15,000 to the cost of the project. Ilianovitch: I can't turn in a report with an overall unfavorable variance! They'll kill me at corporate headquarters. Call up Laura at Ferguson and ask her not to send the bill until after the first of the year. We have to have that $21,000 favorable variance for industrial engineering on the report. Required: What should Tom Kemper do? Explain. Page 494