Question

Ch 4 - EYK4-1 - p. 163-164

EYK4-1. Ethics Case Sweet Fragrances Company uses process costing to account for the manufacture of its perfume. The factory consists of three departments: Blending, Bottling, and Packaging.

The production manager of the Bottling department, Janine Post, has recommended that her department not be charged for new labels that are more elaborate and expensive than those used in previous years. The new labels were designed as a tie-in for the marketing and advertising campaigns. Post recommends that the costs of the labels be charged to advertising expense. This would result in slightly lower product costs charged to the bottling department than last year.

The company has instituted a bonus plan for all managers based on keeping costs within a range of previous years’ costs.

Sam Block, the accounting manager, reviews all recommendations by managers before they are presented to top management.

Required

What ethical considerations may arise from Janine Post’s recommendation? What alternative recommendations might be made?

Answer 1

Ethically Janine Post’s commendation is correct the cost of new labels should be charged to the Advertising expense because the Bottling department should be charged for the labor, filling machine and other bottling expenses only and the labeling and publicity expenses would be charged to as common costs under the Advertising expenses.

As per trend, if the label charges has to be charged to bottling department, than the extra labeling charges pertains to “tie in for the marketing and advertising campaigns” could be charged under the Advertising expenses as common costs. This will console Janine Post of occurring extra label charges burden.

However, to eliminate the expensive label charges conflict, the top management can change the basis of bonus plan from “keeping costs within a range of previous year’s costs” to some other basis, like share in the total cost of Product, saving in the labor and overhead costs over last year.