Leveraging Cost Accounting to Manage Earnings: Evidence from Toshiba’s Semiconductor Business

Abstract

This case pertains to the interplay of cost accounting, performance measurement, and financial reporting issues in Toshiba’s Semiconductor Business. It addresses how Toshiba manipulated its reported profits by inappropriately allocating its budgeted fixed overheads and not recognizing inventory losses in a timely manner in the financial statements. These manipulations overstated profits of the Semiconductor business by ¥36.0 billion, almost a quarter of the total of Toshiba Corporation’s ¥151.8 billion profit overstatement. The Investigation Report indicated that the profit manipulations were a likely outcome of top management’s unrealistic expectations. For the Semiconductor business of Toshiba, the timely recognition of inventory losses would have offset the profit misstatements resulting from the inappropriate allocation of budgeted fixed overheads. Alternatively, proper allocation of budgeted fixed overheads would have reduced or even avoided the need to recognize inventory losses. The case provides an integrative view of cost accounting and financial accounting.