Question

How would you respond to this post?

Several problems can arise when evaluating divisions that have different accounting methods. One of the issues that can arise is determining overhead costs and allocating inventory within various divisions. In this case, one division could calculate inventory costs difference from another division, which can cause inventory value to be under or overstated. The second problem is the accuracy of net profits based on the accounting methods used by each division (Schneider, 2017). The three divisional accounting method are segment margin, division controllable margin, and division contribution margin. Segment margin involves the profit and losses that can be traced to a particular segment within a company. Division controllable margin consists of total revenue minus any costs that can be controlled by the division manager. In this case, the division manager can choose which costs to deduct from the total profits. Finally, division contribution margin involves total revenue minus variable costs. In this case, fixed costs are not used to calculate the contribution margin. Different accounting methods can cause division profits to differ. One accounting method that will create a profit difference is FIFO versus LIFO. For example, the produce division of a grocery store might prefer to use the FIFO method, which involves the oldest produce product to be sold first. The electronic department prefers to implement the LIFO method, which sells the newest product first. In this case, both divisions will calculate a difference in net profits based on which methods are used. A second accounting method is periodic versus perpetual inventory. In this case, one division uses the periodic system, which occasional calculates the inventory. Another division uses the perpetual inventory, which keeps a continuous track of inventory that is sold or purchased. If both divisions use different methods of tracking products than the number of goods will vary as well as net profits. Finally, the depreciation method such as straight-line vs. declining-balance will affect the division profits. For example, one department prefers to use the straight-line method, which deducts the depreciation value of equipment every accounting period. On the other hand, another department uses declining-balance, which deducts the depreciation value in the early years of the assets to reflect a lower profit. Both methods can cause a difference in net profits depending on which depreciation method is used in each department. Overall, accounting methods can cause divisions profits to reflect differently depending on the business decision of each department.

Answer 1

Answer:

We will respond to this scenario as below

The stated scenario is related to the accounting and inventory reporting practices that are being used at the business level. There is no standard accounting methods that need to be used by the business across nation level or globally. There are multiple accounting methods that can be used by the businesses and generally business uses the accounting methods based on their best suitability so that their commercial purpose are fulfilled with the selected accounting methods.

Inventory reporting method needs to be applied on common standard without suiting to the profit of the business. The inventory reporting method should not be explored by the business and making it suitable to their commercial interest. The inventory reporting method should be genuine and it should focus on right approach for the business so that businesses gets the benefit from it in long term. This should present the real image of the business and should show good inventory accounting methods.

The accounting reporting method needs to be standard and it should be common across all the business units. The financial accounting method should not be explored for commercial means and it should not focus on the short term commercial benefits of the business. It should focus on real approach for accounting reporting and it should use the right accounting method that is most suitable for the business and needs to meet the ideal approach for the same.

The government should come out with standard accounting and inventory reporting methods based on the businesses category so that this will create the common standard in the global market and will prevent from the over and under stated financial accounting. This will avoid the major frauds in the business.