Bill Fremont, division controller and CMA, was upset by a recent memo he received from the divisional manager, Steve Preston. Bill was scheduled to present the division’s financial performance at headquarters in one week. In the memo, Steve had given Bill some instructions for this upcoming report. In particular, Bill had been told to emphasize the significant improvement in the division’s profits over last year. Bill, however, didn’t believe that there was any real underlying improvement in the division’s performance and was reluctant to say otherwise. He knew that the increase in profits was because of Steve’s conscious decision to produce more inventory.
In an earlier meeting, Steve had convinced his plant managers to produce more than they knew they could sell. He argued that by deferring some of this period’s fixed costs, reported profits would jump. He pointed out two significant benefits. First, by increasing profits, the division could exceed the minimum level needed so that all the managers would qualify for the annual bonus. Second, by meeting the budgeted profit level, the division would be better able to compete for much-needed capital. Bill objected but had been overruled. The most persuasive counterargument was that the increase in inventory could be liquidated in the coming year as the economy improved. Bill, however, considered this event unlikely. From past experience, he knew that it would take at least two years of improved market demand before the productive capacity of the division was exceeded.
Required:
- 1. Discuss the behavior of Steve Preston, the divisional manager. Was the decision to produce for inventory an ethical one?
- 2. What should Bill Fremont do? Should he comply with the directive to emphasize the increase in profits? If not, what options does he have?
- 3. Chapter 1 listed ethical standards for
management accountants. Identify any standards that apply in this situation.
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EBK CORNERSTONES OF COST MANAGEMENT
- Howard Rockness was worried. His company, Rockness Bottling, showed declining profits over the past several years despite an increase in revenues. With profits declining and revenues increasing, Rockness knew there must be a problem with costs. Rockness sent an e-mail to his executive team under the subject heading, “How do we get Rockness Bottling back on track?” Meeting in Rockness’s spacious office, the team began brainstorming solutions to the declining profits problem. Some members of the team wanted to add products. (These were marketing people.) Some wanted to fire the least efficient workers. (These were finance people.) Some wanted to empower the workers. (These people worked in the human resources department.) And some people wanted to install a new computer system. (It should be obvious who these people were.) Rockness listened patiently. When all participants had made their cases, Rockness said, “We made money when we were a smaller, simpler company. We have grown, added…arrow_forwardMark Fletcher, President of SoftGro, Inc., was looking forward to seeing the performance reports for November because he knew the company's sales for the month had exceeded budget by a considerable margin. SoftGro, a distributor of educational software packages, has been growing steadily for approximately two years. Fletcher's biggest challenge at this point was to ensure that the company did not lose control of expenses during this growth period. When Fletcher received the November reports, he was dismayed to see the large unfavorable variance in the company's Monthly Selling expense Report that follows: Annual Budget November Budget November Actual November Variance Unit sales 2,000,000 280,000 310,000 30,000 Dollar sales $ 80,000,000.00 $ 11,200,000.00 $ 12,400,000.00 $ 1,200,000.00 Orders processed 54,000 6,500 5,800 -700 Sales personnel per month 90 90 96 -6 Advertising $ 19,800,000.00 $…arrow_forwardCharles worked at Butterfly Corporation for two years after graduating from the University of Texas. He liked his job but the firm was going through some rough times. Because the firm was losing money, Douglas, the CEO, set increasingly rigorous performance goals. Charles noticed a lot of employees were grumbling about these unrealistic expectations. He also heard rumors of quality control incidents and other problems. One day Charles was called into Douglass office. “Hello, Doug. You wanted to see me?” Charles asked. “Yes, Charles. Come in.” Doug looked grim. After Charles sat down, he began to speak. “Look, you know about the tough times we are in. We are losing money left and right. So far I’ve been able to keep this company afloat by drastically making cuts and speeding up production. I guess in all this cost-cutting, there have been problems that have come up. A lot of people have called the hotline to complain about ethical problems, such as employees cutting corners to make…arrow_forward
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