Ethics a. What parties (stakeholders) may be harmed or benefited? b. Whose right

Question

Ethics
a. What parties (stakeholders) may be harmed or benefited?
b. Whose rights or claims may be violated?
c. Which specific interests are in conflict?.
d. What is the effect of each alternative on the various stakeholders? Which stakeholders are harmed or benefited most?

A Division of the Company uses absorption costing for profit reporting. The general manager of the Division is concerned about meeting the income objectives of the division. At the beginning of the reporting period, the division had an adequate supply of inventory. The general manager has decided to increase production of goods in the plant in order to allocate fixed manufacturing cost over a greater number of units. Unfortunately, the increased production cannot be sold and will increase the inventory. However, the impact on earnings will be positive because the lower cost per unit will be matched against sales. The general manager has come to you, the controller, to determine exactly how much additional production is required in order to increase net income enough to meet the division's profit objectives. You analyze the data and determine that the inventory will need to be increased by 40% in order to absorb enough fixed costs and meet the income objective; however, you also determine the increased inventory cannot be sold given existing demand. Prepare your report regarding your decision to the division manage

Explanation / Answer

The manager to meet the Division's objectives towards profit is determined to increase the production to any extent. By doing so, the manager wants to transfer the production cost (ie. fixed manufacturing cost) of the present period to the next period through "Ending Inventory" of finished and semi-finished goods.

As it is brought-up that the increased inventory is such a huge quantity that it could not be sold given existing demand. The effort of the increase in the output will increase the inventory damages, repair and storage costs. This will reduce the profit of the upcoming years.

a. Parties got harmed / benefited : The shareholders and the employees get benefited from the present year's increased income, as they get good dividend and bonus. But as the cost of the coming up period increases due to damages which affects income of the company and effects the attached stakeholders like Shareholders, employees, supplies/creditors and banks. The payments of supplies and creditors and bank’s principle and interest got struck if the inventories could not be sold and cash fall short.

b. Stakeholders Rights and Claims that got violated : The dividend to the shareholders got reduced. The bonuses of the employees get affected. The payments to the suppliers/ creditors and Banks/Investors got affected.

c. Specific interests : The specific interests of a) the shareholders, b) employees, c) suppliers & creditors and d) the Banks are in conflicts with each others for higher benefits to the specific beneficiary due to shortage of the profits and cash.

d. Stakeholders most affected : The shareholders are the legal owner of the company are the most beneficiary in the present year and worst effected stakeholder in the future years when income reduces.

However, the managers attempt to fulfill the objective of the company’s income through increasing the inventory level for transfer of fixed manufacturing costs to next year, is totally unfair and unethical towards the stakeholders like shareholders, employees, suppliers and fund providers/banks.

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