The Blue Rabbit Company manufactures lawn and garden concrete and resin statues.

Question

The Blue Rabbit Company manufactures lawn and garden concrete and resin statues. It uses a standard costing system for its products. Managers and production personnel are paid bonuses based on attainment of material, labor and overhead standards. The standards are recommended by a committee that is composed of engineers, production staff, and accountants. The accounting manager, however, has the final say on what the standards will be for each upcoming year. Four years ago, the senior management at Blue Rabbit adopted a “zero-defects” strategy thoughout the organization. As part of the zero-defects strategy, the company has been using ideal standards. Senior management has pointed out that it does not want to build waste into the standards by using practical standards. The adoption of ideal standards has been somewhat problematic at Blue Rabbit and there has been a lot of resistance from employees to the ideal standards. Mike Anderson is the accounting manager at Blue Rabbit and is currently evaluating the material, labor, and overhead standards for the upcoming year. The standards committee has already met and made its recommendations. The standards are, as directed by senior management, extremely tight and allow for zero waste, breakdowns, or downtime. The plant manager, Dana Sullivan, comes to Mike and asks him to loosen the standards for the upcoming year. The plant manager is upset that the standards are set at a 100% efficiency rate (zero defects). Dana points out that everyone’s bonuses is on the line if the standards are not met. Some jobs may also be lost if standards are not met. Dana feels that the standards are unattainable and are not fair to employees. Dana even indicates that Mike’s job might possibly be on the line if another year goes by without standards being achieved. Mike gets together with a close friend, Julia Leiser, and discusses the matter at length with her. He tells her he feels guilty if the production staff does not get bonuses because of the way that the standards are set. He is also worried about his own job over the long run; it is in his best interests to have a good relationship with the plant manager. The economy is bad and he does not know how long it would take to get a new job. Mike shows Julia the ideal standards recommended by the committee and then shows her the adjustments that he thinks he could make to help make the standards achievable. Julia agrees that the standards should be adjusted. Requirements: 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 this situation? b) What are Mike Anderson’s responsibilities as a management accountant? 2. Should Mike adjust the standards to a more achievable level in this situation? Support your answer. 3. Describe another way that Mike could handle this situation that would not violate the IMA Statement of Ethical Professional Practice.

Thank you!

Explanation / Answer

(1) As per the IMA Statement of Ethical Professional Practice :

(a) The Ethical issues in this situation are :

Competence : Mike should Recognize and Communicate professional limitations or other constraints i.e. impracticability of standards to decision makers. This would ensure responsibility judgement as well as successful performance of the activities.

Confidentiality : Mike has the responsibility to keep the internal information regarding the standards confidential and his disclosure of such information to his friend has rendered him vulnerable to disciplinary action to be taken against him.

Integrity : Mike should act in order to mitigate conflict of interest. In the present scenario the standards based on 'Zero Defect' Policy seem to be unrealistic and unachievable as there is bound to be some normal and abnormal wastage and therefore the interests of the employees are at stake as they are in risk of losing their jobs. He should communicate with his superiors to resolve the conflicts.

Credibility : Communicate information fairly and objectively. Mike should abstain from thinking that his job is at a risk and should instead take steps to encourage positivity in himself as well as among his subordinates.

(b) As a Management Accountant Mike has following responsibilities :

The management accountant is an important pillar of decision making in an organisation since he has the responsibility of collecting vital information from both within and outside the organisation. He has following responsibilities:

(1) Mike should establish, coordinate and administer an adequate plan for the control of operations.

(2) Mike should compare the previous performance with plans set, ascertain and analyse variances. He should prepare a detailed report enlisting the causes of these variances which occured in past years.

(3) He should take steps to develop techniques which help in minimising these variances, and help to set the most efficient targets.

(4) He should communicate the concerns of the employees to his superiors and take necessary steps to convince them about the impracticability of the standards previously set on the basis of ' Zero Defect Policy' and the need to change the standards to more attainable and efficient standards.

(5) At the same time he should keep in mind the overall objective of the organisation and not just succumb to the demands of employees by setting more or less easily achievable standards that may not challenge the employees in the long run to fpcus on improving efficiency.

(6) Mike as a Management Accountant, is acting as a link between the Decision making top management and the low level staff and should assume responsibility towards both of them and not just be concerned about the loss of employees.

(2) Yes, Mike should adjust standards to a more achievable level in this situation but not without consulting his immediate superior. He should prepare a detailed analysis and find out how much relaxation in standards is reasonable and how much is still achievable if employees are motivated to work more efficiently, thus reducing unnecessary wastages and achieving economies to scale and realising the revised standards in competent manner.

(3) Instead of discussing the issue with his friend and violating the principle of Confidentiality Mike should have discussed the issue with his Superior. If it bore no fruit, he could have approached a more higher level officer to help resolving the issue. He could address the issues to a senior level after performing his analysis to gain an understanding as to what should have been the ideal level of operations and what could be done to set the ideal level of standards to help achieve the ideal results

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