Question

Susan Mills, Company B's chief accountant, has developed an automated costing system that helps track the cost of production activities. This system is capable of accurately measuring and allocating post-manufacturing activities, such as selling, promotional, and distribution activities, in such a way where Company B gets a more detailed view of its product costs. One of the benefits of this system is that it allows Company B to determine which product lines are more profitable.

When Susan implemented the new costing system, she realized that the company's current period profits would increase significantly if the new product cost information was used for inventory valuation on the financial statements. Susan has been under intense pressure to improve the company's profits, and this would be a quick and effective way for her to help meet the company's short-term profit goals. As a result, Susan has decided to use the automated costing system to determine the company's profits.

1. Why do the company's profits increase when the new costing system is implemented?

2. Is Susan acting ethically by using the new costing system for determining the company's profits? Explain your answer.

Answer 1

Under new Costing system , Susan Mills, Company B's chief accountant 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 accountant realized that companies current period GAAP net income significantly increase if the new product cost information used in Inventory valuation .

Accountant is under intense pressure to improve net income of the company.

Accountant also noticed that this system will meet her company’s short term net Income goals.

Most important to understand why company’s 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 in 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 Susan acting ethically by using the new costing system for determining the company's profits-

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 cannot change any system in hurried way to boost up net Income. If accountant wants to do that then this is not ethical. Accountant has to disclose all facts and figure in to the financial.