Question

    Fanfare Products, Inc., is a manufacturer of mobile devices. Kyle is the plant manager at Fanfare's Toledo, Ohio, plant. The Toledo plant manufactures a smartphone, the Zoom, which has sold well for the past six months. Kyle is being considered for promotion to manager of the entire West Coast division of Fanfare Products. Bethany is an accounting supervisor at Fanfare Products and is a good friend of Kyle's.

    Kyle and Bethany are having lunch in the company cafeteria. There are about six weeks left in the current fiscal year. Kyle is concerned that his plant will be showing a loss rather than a profit he has projected for the year. The reason for the shortfall is that demand has radically declined for the Zoom smartphone currently manufactured by Kyle's plant. New smartphones with more features have been brought to market by Fanfare's competitors. Engineers at Fanfare are currentling working on an updated model of the Zoom, but it will not be ready for production in Kyle's plant for another five months. If Kyle's plant shows a loss this year, Kyle will not receive his performance bonus for the year. He also knows that his chance of promotion to the West Coast manager will be greaty reduced.

    Bethany thinks about Kyle's situation. She then shares with him a strategy that he can use to help increase his profits. She explains that under absorption costing, the more units in ending inventory, the more costs can be deferred. Using her tablet, she makes up a quick example in Excel to show him how he can turn his situation around and show operating income for the year.

    Bethany's first spreadsheet assumes the five units are produced and sold in this hypothetical situation:

        Scenario #1

        Traditional Income Statement (5 units produced & 5 units sold)

        For the year ended December 31

Sales Revenue                             $150

Less: Cost of goods sold              115

Gross profit                                    $35

Less: Operating expenses              55

Operating income (loss)                $(20)

    If five units are produced and sold, the hypothetical company would have a loss of $20. Now Bethany changes just one fact; instead of producing five units, the company in the example produces ten units. No other facts change-the company still sells just five unit. Bethany shows Kyle the revised income statement under the increased production scenario:

    Scenario #2

    Traditional Income Statement (10 Units produced & 5 units sold)

    For the year ended December 31

Sales Revenue                             $150

Less: Cost of goods sold               65

Gross profit                                    $85

Less: Operating expenses              55

Operating income (loss)                $30

    Under this second scenario, the operating income would be $30, which is quite a bit higher than the original scenario. Bethany again emphasizes that the only fact that was different between the two scenarios is the production, and therefore ending inventory, increased in the second scenario.

    Bethany then urges Kyle to put on a major production push in the last month of the year. If he does, he will be able to push his income up to near projected levels. With the higher income, he will receive his annual performance bonus. In addition, he feels that his chances of getting the West Coast manager position are excellent. 

    1. Using the IMA Statement of Ethical Professional Practice as an ethical framework, answer the following questions:

        a. What is (are) the ethical issue(s) in situation?

        b. What are Bethany's responsibilities as a management accountant?

        c. Has Bethany violated any part of the IMA Statement of Ethical Professional             Practice? Support your answer.

    2. What causes the shift from a loss to a profit in the hypothetical example?

    3. What problems, if any, are caused by building inventories at year end?

    4. What could Fanfare Products do to prevent future situations like the one                 described in this case?

Answer 1

Ethics

The field of ethics includes systematizing, protecting, and prescribing ideas of right and wrong behavior. Philosophers today more often than not partition moral hypotheses into three general branches of knowledge: metaethics, regulating morals, and connected morals.

1.

a.

The ethical issues in this circumstance are:

Competence: "Give choice help information and suggestions that are exact, clear, brief, and convenient." Bethany is asking K to expand generation, which would wind up with mistaken and hazy information in light of the fact that the records would show a benefit on a division that is really operating at a loss.

Integrity: "Decline taking part in or to support any activity that may dishonor the profession." B and K would both be occupied with an activity that may ruin the profession if B empowers the expansion underway and K plays out the increment, for the essential reason for personal gain.

Credibility: "Convey information honestly and objectively." By expanding the production to pick up a profit as a bonus, K would report the information in a non-target way.

Integrity: "Moderate genuine irreconcilable situations." B has an irreconcilable circumstance since B needs to help her companion K as opposed to following ethical rules. K has an irreconcilable situation since K needs to get a bonus and a promotion.

b.

Bethany's duties as a management accountant incorporate urging K to report the information precisely and objectively and to put exactness and the profession above personal profit.

c.

B has dishonored bits of the IMA morals standard, as follows:

Competence: "Give choice help information and suggestions that are exact, clear, brief, and convenient." Bethany is asking K to expand generation, which would wind up with mistaken and hazy information in light of the fact that the records would show a benefit on a division that is really operating at a loss.

2.

By producing more units, more fixed overhead is "caught" in ending inventory. The cost of that fixed overhead is added to assets (as stock) and does not bring down operating income until the point when those units are sold. The fixed overhead that is sitting in ending stock on the balance sheet makes the move from a loss to profit (if more units are delivered).

3.

The issues caused by building inventories toward the ending of the year are that it will affect the gainfulness of the following financial year, and additionally be a poor business hone if the units are manufactured only to increase the current on-paper productivity. The units will be old and unsold because of quickly evolving technology. The units are as of now obsolete before the expansion production.

4.

Display Products could build up inward strategies that require incorporating existing inventory in any assessment of a division's benefit. They could likewise make the people who are in charge of the accounting and control production, not have execution rewards connected to these things. That would expel a moral clash. Likewise, the organization should utilize variable costing for execution assessments. Absorption costing permits wage control though factor costing does not permit income manipulation.