Question

Klein Builders. Inc. allows employees to purchase, at cost, manufacturing materials such as metal and lumber, for personal use. To purchase materials for personal use, an employee must complete a materials requisition form which then must be approved by the employee's immediate supervisor. The assistant cost accountant then charges the employee an amount based on the manufacturing company's net purchase cost.

George, an employee, who happens to be the assistant cost accountant, is in the process of replacing a deck on his home and has requisitioned lumber for personal use, which has been approved in accordance with company policy. In computing the cost of the lumber, George (the assistant cost accountant) reviewed all the purchase invoices for the past year. He then used the lowest price to compute the amount due for the company for the lumber.

Discuss whether this is a good company policy, include if there are proper internal controls in place. Discuss if the assistant cost accountant behaved in an ethical way. Discuss if there should be any type of corrective action. How should the company management handle this situation? Feel free to share any situations that sound similar in the real world.

Answer in 3 paragraphs

Answer 1

The objective of this company policy may be providing its employees the benefit of availing some of their needs at cheaper than market prices and also it may help the company in building the employee loyalty towards the company. However, this may not be a good company policy because mainly of two concerns:

1. Some employees may misuse the facility by purchasing at cost and selling the material in the open market.

2. Possibility for supply interruptions for production due to unforeseen requests of materials by employees.

Offering manufactured goods at discounted prices to the employees might be a better choice.

Approval from immediate supervisor can said to be essential internal control to avoid misuse of this facility but alone this can't be sufficient. Other controls such as limitation on number of times each employee can use this facility and also amount threshhold are essential. Periodic internal audit of uasage of this facility will work as deterrent for misuse by employees. Also Company must have clear policy or guidelines in determining cost of or assigning cost to such materials.

In this case, George, assistant Cost accountant, has not behaved ethically. It is the deceit of trust and misuse of the position. Involving in one unethical issue will induce in further fraudlent activities. It is possible that he may collude with other employees by providing deflated costs against their purchases.

The company should take corrective action. It may contemplate any or in combination of the following actions based on circumstances and possibilities:

1. Collect original cost from George and warn him of any future misconduct.

2. Transfer him into different position and ensuring close monitoring of his work.

3. Dismissal from the service.

4. Initiating disciplinary or legal action.

5. Forensic audit of his previous works.

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