Question

The controller of Tri Con Global Systems Inc. has developed a new costing system that traces the cost of activities to products. The new system is able to measure post-manufacturing activities, such as selling, promotional, and distribution activities, and allocate these activities to products in a manner that provides a more complete view of the company's product costs. This system produces better strategic information about the relative profitability of product lines.

In the course of implementing the new costing system, the controller realized that the company's current period GAAP net income would increase significantly if the new product cost information were used for inventory valuation on the financial statements. The controller has been under intense pressure to improve the company's net income, and this would be an easy and effective way for her to help meet the company's short-term net income goals. As a result, she has decided to use the new costing system to determine GAAP net income.

1. Why does the company's net income increase when the new costing system is applied?

2. Is the controller acting ethically by using the new costing system for GAAP net income? Explain your answer.

Answer 1

Under new Costing system , Controller of Tri Con Global System noticed that new system is able to measure post manufacturing activities such as selling , promotional and distribution activities and allocate of these activities to product which started giving better strategic way of information relative Profitability of product line. Profitability as per product base costing system after considering all relevant cost ( post manufacturing cost) is good for company .

While implementing new costing system , the controller realized that companies current period GAAP net income significantly increase if the new product cost information used in Inventory valuation .

Controller are under intense pressure to improve net income of the company .

Controller also noticed that this system will meet her companies short term net Income goals .

Most important to understand why companies Net income will improve after change in costing system – change in costing system will impact on Inventory valuation which is most important to increase bottom line mainly because the reported amount of Inventory will affect

Cost of gods sold

Gross profit

And net income    

The cost system for Inventory Valuation may have been developed to provide a reasonable total cost of inventory and a reasonable          total cost of goods sold n order to have accurate financial statement and Net income .

New costing system help companies to calculate true cost of a product and customer by assigning cost and expenses other than manufacturing cost . The company will assign cost based on many cost driver . This results are more accurate and provide correct accurate Net income . ( normally experience with Activity based costing ABC system )

Is the controller acting ethically by using the new costing system for GAAP net income?-

As per standard and Auditing principle and GAAP disclosure , any change in method of accounting , valuation technique , change in costing method , change in depreciation method – company management needs to provide complete detail note in the financial statement along with retrospective impact on bottom line ( Net Income) on the company . So Management can not change any system in hurried way to boost up net Income . If controller wants to do that then this is Not ethical . Controller has to disclose all facts and figure in to the financial .