Ethical Decision Making on Various Managerial Accounting Issues

6054 Words Sep 30th, 2011 25 Pages
JAMAR

Vol. 2 · Number 2 · 2004

Ethical Decision Making on Various Managerial Accounting Issues
Arnold Schneider* Abstract This study examines five managerial accounting issues that have ethical implications. These issues are based on situations described in managerial accounting textbooks. To induce truthful responses, an approach called the randomized response technique is used. With this technique, estimates are obtained for responses to sensitive questions relating to the five issues. Results ranged from 9 percent to 51 percent of participants making decisions that are at least questionable from an ethical perspective. Key Words

Introduction
Many issues in the area of managerial accounting have ethical implications. This is
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The Issues The five issues selected for study all come from decision situations appearing in managerial accounting textbooks. Two situations involve investment decisions, one entails a production decision, one deals with cost allocation, and one involves estimation judgment. Each of these five issues is detailed in the Appendix and is explained in the remainder of this section. Issue #1: Overproduction
The first issue relates to the proposition discussed in the previous section that managers’ decisions may be motivated by the desire to manipulate earnings. Specifically, Issue #1 involves the controversy over absorption costing (i.e., full costing) versus variable costing. Advocates of the latter state that with absorption costing, net income is susceptible to manipulation by managers because fixed overhead is a product cost and, therefore, unit costs can be lowered by merely increasing current production. This lowers cost of goods sold and, in turn, yields a higher current net income. As Zimmerman (2000, p. 496) states, “Managers rewarded on total profits calculated using absorption costing can increase reported profits by increasing production (if sales are held constant). A major criticism of absorption costing is that it creates incentives for managers to overproduce, thereby building inventories.” Horngren et al. (2002, p. 609) also note that
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Issue #2: Cost Allocation
The
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