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Aircraft manufacturers use job-order costing to determinethe cost of an airplane. As this chapter discusses, supply chainmanagement and production controls are also important tools used bymanufacturers to manage production costs. As
BusinessWeekreports, however, things don’t always go according toplan. For three years, Boeing’s top management had beenseeking a merger with McDonnell-Douglas Corporation,whose board of directors was reluctant to approve the deal.Finally, the deal went through, and the world’s largest aerospacecompany was born—“the first manufacturer ever with the ability tobuild everything that flies, from helicopters and fighter jets tospace stations.” Unfortunately, “a disaster was quietly unfolding insideBoeing’s sprawling factories—one that would ultimately wind upcosting billions of dollars, cause several executives to lose theirjobs, and lead to claims of accounting fraud. Facing anunprecedented surge in orders because of a booming economy, workerswere toiling around the clock, pushing the assembly line to thebreaking point. At the same time, the company was struggling tooverhaul outdated production methods. These pressures were buildingup to what was, in essence, a manufacturing nervous breakdown. Inthe weeks after the merger announcement, parts shortages andovertime approached all-time highs. As costs went through the roof,the profitability of airliners such as the 777 swooned. A specialteam formed to study the crisis issued a report with a bluntconclusion: ‘Our production system is broken.’” Had investors “understood the scope of the problems, thestock would probably have tumbled and the McDonnell deal—a stockswap that hinged on Boeing’s ability to maintain a lofty shareprice—would have been jeopardized.” In May of 2002,
BusinessWeek reported the resultsof its three-month investigation, which “reconstructed this hiddenchapter in the company’s history—and analyzed its currentimplications.” The
BusinessWeek article alleges that “newdetails supplied by several inside witnesses indicate that Boeingdid more than simply fail to tell investors about its productiondisaster. It also engaged in a wide variety of aggressiveaccounting techniques that papered over the mess. Critics say thecompany should have taken charges for the assembly-line disaster inthe first half of 1997, even if it meant jeopardizing the McDonnellmerger. They also claim that Boeing took advantage of the unusualflexibility provided by
program accounting—a system thatallows the huge upfront expense of building a plane to be spreadout over several years—to cover up cost overruns and to booksavings from efficiency initiatives that never panned out. ‘Boeingmanaged its earnings to the point where it got caught,’ says DebraA. Smith, a partner at Constraints Management, a Seattle-areamanufacturing consultancy, and a former senior auditor at Deloitte& Touche who worked on the company’s account during the early1980s. ‘Boeing basically decided in the short run that [managingearnings] was a lesser evil than losing the merger,’ adds Smith. Ata time when investors are asking themselves how far CorporateAmerica can be trusted, the Boeing saga provides rich new evidencethat companies have much greater leeway to manipulate their numbersthan most people suspect.”6 Boeing allegedly used a system they called
programaccounting to spread their huge cost overruns across severalyears, thereby propping up earnings and the company’s share price.After the merger with McDonnell-Douglas, however, the truth cameout in the form of much lower earnings. What is your view of how Boeing handled its cost overruns,its production problems, and the merger with McDonnell-Douglas? Didthe company’s top executives act ethically? How about theiraccountants? . . .