ACCT 403 001 Fall 2017 Due by 12/s Ethical Case-Individual Work Midwest Company
ID: 2568463 • Letter: A
Question
ACCT 403 001 Fall 2017 Due by 12/s Ethical Case-Individual Work Midwest Company is a furniture manufacturer located in the midwestern states. Midwest Company has enjoyed a loyal local clientele willing to pay premium prices for the highquality furniture. In the last two years, Midwest Company has experienced rapid sales growth in its operating region and has had many inquiries about supplying its products on a national basis. To meet this growth, Midwest Company expanded its processing capabilities, which resulted in increased production and distribution costs Furthermore, Midwest Company has been encountering pricing pressure from competitors outside its normal marketing region. Because Midwest Company desires to continue its expansion, Midwest Company concluded that, although premium pricing is sustainable in some areas, Midwest Company must make some price concessions if sales growth is to be achleved. Also, to maintain profit margins, the company must reduce and control its costs. Midwest Company recently completed the installation of a new standard-costing system, which has been in place now for six months. The reward system at Midwest Company is such that purchasing manager earns a financial reward when a variance is realized significant favorable materials purchase-price im Morgan, purchasing manager, was about to place an order for wood to be used in Midwest Company's coffee tables. Jim had found a supplier that will furnish the necessary wood at $S per board foot, rather than standard cost $7. This is very appealing to Jim, since his annual bonus is influenced by ny favorable price im realized that the wood being offered would not be well-suited for use in coffee ta problems attributable to the low-grade materials are not likely to surface until the products from which these materials are made have been in use for a while by consumers. lim decided to place an wood. One month later, the controller noticed the large favorable price variance. variances he is able to obtain. After further discussions with the potential supplier, bles. But any order for Required 1. Explain strateg ic issues regarding the decision to adopt a standard costing system, particularly in light of competitive forces confronting this company. Describe several ways that a standard cost 2. Did the purchasing manager, act ethically? Explain. (Consult IMA's Stotement of Ethica 3. According to IMA's Stotement of Ethical Professional Proctice, what is the controller's obligation 4. Some individuals allege that the practice of tying managerial rewards to budgeted performance system could improve (i.e, strengthen) an overall management control system. Professional Proctice www.imanet.or l in this situation? What should the controller do? has dytunctional consequences, nduding bur not Iimited to) gaming behavior Searchthe Internet and pertinent literature (eg Michael C. Jensen, "Corporate Budgeting is Broken-Let's Fix it," Harvard Business Review, November 2011, pp. 94-101) to further explore the issue of negative incentive effects associated with budgeting practicesExplanation / Answer
Answer 1.
Part a
Strategic issues/ aspects regarding the decision to adopt a standard costing system by Midwest Company in the light of competitive forces facing the company:
i. The company should adopt standard costing in order to evaluate the performance of a particular cost or responsibility center with respect to other players in the market. This kind of performance evaluation can help in knowing the company’s position and capability in the market.
ii. Another issue of cost control should be the basis for taking such a decision as standard costing is used in conjunction with management by exception by working in areas where actual results differ from expected results. Thus, preparation and use of standard cost, their comparison with actual costs and the measurement and analysis of variances to their causes and points of incidence helps to control the costs vis-à-vis the competitors in the industry.
iii. The company can also adopt standard costing to determine selling prices while preparing price quotations. Formulating the pricing policies in helps in prompt decision-making which is very necessary to face the growing competition.
Part b
Ways in which standard costing can improve the overall management control system:
i. Budgetary control systems compare actual costs with budgeted costs by computing variances. Herein, standards are often indispensable in the establishment of budgets. Thus, standard costing aids budgetary control.
ii. An overall variance can be decomposed into a price and a usage or efficiency variance and the use of efficiency variances enhances operational control.
iii. It enables the managers to have more control over the usage of inputs than over their prices. Thus, it aims at managerial control by comparison of actual performances with suitable predetermined yardsticks.
iv. It can help in kaizen costing which aims at continuous improvement through cost reduction. Standard costing can thus help to identify areas where cost reduction is required as a result of unfavorable price variances.
Answer 2.
No, the purchasing manager did not act ethically as he compromised on the quality of the final product. He is placing his personal interests above integrity of the profession.
While adopting standard costing, the objective is to identify the variances in terms of price, usage and efficiency and to take corrective actions accordingly. Standards create adverse psychological effects eg. If the standard is set at a very high level, its non-achievement would result in frustration and build-up of resistance. Or as in the case of Westland Company, linking the standard costs to the incentives has also created undue pressure on the purchasing manager to achieve a favorable direct material price variance. Moreover, deviation from the standard should not be severely penalized as it also leads to adverse psychological impact on the employee’s performance.
The purchasing manager in this case is expected to show integrity by mitigating such conflicts of interest. He should refrain from engaging in any conduct that would prejudice carrying out duties ethically. He should also abstain from engaging in or supporting any activity that might discredit his profession. Moreover, he should contribute to a positive ethical culture.
Answer 3.
Part a
As per IMA Statement of Ethical Professional Practice:
i. When faced with unethical issues, the controller should follow the established policies of his or her organization, including use of an anonymous reporting system if available.
ii. In the absence of established policies, the controller should discuss with the employee’s immediate supervisor. If the supervisor appears to be involved, the issue could be presented to the next level of management.
iii. The controller should consider any legal obligations, rights, and risks concerning the issue. Thus, consider all risks involved and whether protections exist against retaliation against the employee.
iv. The controller should keep the information confidential and communicate the same only with the appropriate authorities.
Part b
On noticing a huge favorable variance, the controller should investigate the reason behind the same. The controller should not ignore it, but rather should actively seek resolution of the issue. The controller may encounter unethical issues or behavior like in the case of Westland Company. Thus, the controller should aim at resolving the ethical issues. He should communicate this variance issue fairly and objectively and should provide all relevant information to the authority that could reasonably be expected to influence their understanding of the reports, analyses, or recommendations.
Answer 4.
Negative incentives associated with budgeting process:
i. Both superiors and subordinates lie in the formulation of budgets and therefore devoid the budgeting process of the critical unbiased information that is required for preparing budgets.
ii. Employees indulge in budget gaming. They game the realization of the budgets or targets and in doing so destroy value for their organizations.
iii. To prevent such counterproductive activities on the part of the employees, linear compensation structure should be followed so that there are no incentives to lie, or to withhold and distort information, or to game the system.
iv. People lie in pervasive budgeting systems because if they tell the truth they often get punished and if they lie they get rewarded. Once taught to lie in this system people generally cannot help but extend that behavior to all sorts of other relationships in the organization. Thus, it leads to the general loss of integrity in organizations.
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