Question

Instructions

Phillips Brothers Printers (PBP) provides printing services to a wide variety of customers. For most jobs, PBP submits a bid and uses the job cost system to accumulate costs, but bills the bid amount to the customers. They do have several customers who routinely have "out of the ordinary" jobs and PBP bills those on a cost-plus basis, with the customer paying the actual costs plus a predetermined profit percentage on the total cost.

Sally Phillips, controller for PBP, is approached by the company President who asks her to look for ways to charge more of the production costs to the cost-plus jobs. His logic is that since those customers will pay all the costs plus a profit, they can improve their overall profitability by shifting costs from bid jobs to cost-plus jobs.

Answer the following questions:

Is the President correct about the increase in overall company profits?

What classification of cost is most likely to be able to be increased on the cost-plus jobs? Why?

Is what the President proposes ethical? Why or why not?

What would you do if you were Sally? Why?

If Sally does go along with this proposal, are there risks to the company? What are they?

Answer 1

Q: Is the President correct about the increase in overall company profits?

A: Yes, shifting the production cost towards the contract with cost-plus billing will increase the overall profitability, proportionally by the profit percentage on such contracts.

Q: What classification of cost is most likely to be able to be increased on the cost-plus jobs? Why?

A: As it is stated in the question increasing the production cost on the cost-plus jobs will increase the "direct costs" because production is the primary activity performed to deliver the final product.

Q: Is what the President proposes ethical? Why or why not?

A: No, the President's proposal is not ethical. He is proposing an unethical activity by wrongfully shifting the cost allocations to earn higher profits.

Q: What would you do if you were Sally? Why?

A: As a controller of the company, she should explain both benefits (i.e. higher profitability) and risks (i.e. unethical activities, higher costs for several customers, risk of losing business). As a controller, she must discuss this proposal in detail with the President and other leadership and must not lose her integrity and prudent practices to follow the instructions of the President.

Q: If Sally does go along with this proposal, are there risks to the company? What are they?

A: Following are some of the risks:

1. Opening the gates of unethical activities in the organization just for the sake of 'higher profit margins'.
2. The company will be vulnerable to repercussions of financial misstatements. This will be caught in the Audit trials.
3. Over-charging the customers may lead to losing business as there might be competitors offering same product/service at lower cost.
4. Risk of law-suits and disputes.