Part -1:
You are an experienced supervisor at the ABC Company. Recently some of the corporation's top executives have been sentenced to prison for unethical behavior, which ended up causing both the company itself to lose money as well as a loss in the stock price and therefore shareholder value. As a result, the firm has embarked upon a company-wide training program in ethical/legal behavior. The trainer has assigned you and other supervisors a brief written assignment.
The trainer indicated that for manufacturing firms using an "absorption-based accounting system," managers and CEOs have the ability to "manipulate" reported profitability in order to enhance their year-end bonuses. They could do this by simply overproducing units that may not be sold right away. This causes some fixed costs to end up in the firms ending inventory, rather than in that period's cost of goods sold (COGS) on the income statement. This makes COGS lower than it otherwise would be, and therefore makes profits higher. While this is legal, it distorts the firm's actual profitability and most people consider it to be unethical.
Discuss the following:
• Describe the ethical issue at hand in your own words.
• Describe why a management accountant would play a role in this "overproducing" issue.
• Discuss your personal opinion on whether you think this is an important issue, and explain why.
• Describe the differences and similarities between managerial accounting and financial accounting.
• If you were the Board of Directors, overseeing this firm's CEO, what would you do to prevent this "overproduction" from taking place simply to enhance his or her bonus?
Part -2:
As a midlevel manager of a company, you are trying to get approval on a new piece of equipment that will make your department more productive. Yesterday, over the phone, you asked the accounting manager for help in writing your proposal, which is meant to justify the spending of money on this investment. She specifically mentioned making sure to cover only those costs and benefits that would be relevant to the decision, and not take into account irrelevant costs and benefits. You are not quite sure what she meant, so you plan to meet with her in the morning to discuss the topic.
Explain your understanding of what relevant versus irrelevant costs and benefits are that might be considered when making a decision.
When trying to decide between buying a new 8-cylinder auto versus a hybrid auto:
o Identify at least 1 example of a relevant cost and a relevant benefit.
o Identify at least 1 example of an irrelevant cost and an irrelevant benefit.