SHORT-SIGHTED VIEW OF COST CUTTING

Jamie Ericsson, the controller for Handico, has just compiled a cost report for the second quarter. The report is prepared each quarter for corporate headquarters. She has taken particular notice of several major cost categories that show significant reductions in expenditures when compared to the first quarter. She made the following list of the major cost cuts:

Cost Item	Cost Reduction($)	Cost Reduction(%)
General employee training	12,000	25%
Routine machine maintenance	13,500	20%
Process improvement	12,000	12%
Quality training	18,000	8%
Raw-material inspection	6,500	9%

Concerned that there may have been errors in compiling the data, Ericsson scheduled an appointment with her supervisor, Les Winters, the divisional vice president. At the meeting, the conversation went like this.

Ericsson (C): Les, I'm concerned about these cost cuts. Are these mistakes, or are we really making such substantial cuts in these areas?

Winters (VP): Your numbers look right, Jamie. I ordered these cutbacks myself. I think there's a lot of fat in this operation that can be cut, and I'm just getting started.

Ericsson (C): But these are all important areas to invest in, Les. I see the invoices for these costs every month, and I don't think it's wasted money at all.

Winters (VP): Corporate wants a lean company, Jamie. I'm just trying to give them one.

Ericsson (C): Have you thought through the implications, Les? Cutting general employee training will eventually take a toll on our productivity gains. Same thing for the cuts in process improvements. And cutting routine machine maintenance could mean breakdowns later on. Maybe not for a year or so, but eventually it'll take its toll.

Winters (VP): Becoming annoyed, Those are my concerns, Ms. Ericsson, not yours.

Ericsson (C): Look, Les, we're all on the same team. I'm just concerned, that's all. I feel as though I need to highlight these cost cuts in my report to corporate. They should at least be made aware of these issues. I'll need your authorization for that.

Winters (VP): No can do, Jamie. You are instructed to make your usual quarterly report using the standard format.

After the meeting, Ericsson was commiserating with her close friend, Amy Ling, the chief of engineering.

Ericsson (C): Amy, I just had a very unsatisfactory meeting with Les Winters. I shouldn't go into the details, but I'm concerned about some things.

Ling (E): Well, I have good news for you then. The grapevine has it that Les is on the very short list for taking over as president of our Japanese subsidiary. That would be a huge promotion for him. Word is that all he's got to do is turn in a good performance for the year here. If he does that, the job's his.

Ericsson (C): That explains a lot, Amy. Thanks for the heads up. I've got some thinking to do.

Required:

1. What steps should the controller, Jamie Ericsson, take? (Refer to the Resolution of Ethical Conflict section of the IMA Statement of Ethical Professional Practice, discussed in Chapter 1 and reproduced on page 26.)

2. How could a balanced scorecard help mitigate the problems apparent in this scenario? (Refer to the textbook / notes discussion on balanced scorecard.)