John Biggs and Patty Jorgenson are both cost
Required:
What should John do? Describe how you would deal with his ethical dilemma (considering the IMA code of ethics in your response).
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Chapter 1 Solutions
Cornerstones of Cost Management (Cornerstones Series)
- Tonya Martin, CMA and controller or the Parts Division of Gunderson Inc., was meeting with Doug Adams, manager of the division. The topic of discussion was the assignment of overhead costs to jobs and their impact on the divisions pricing decisions. Their conversation was as follows: Tonya: Doug, as you know, about 25% of our business is based on government contracts, with the other 75% based on jobs from private sources won through bidding. During the last several years, our private business has declined. We have been losing more bids than usual. After some careful investigation, I have concluded that we are overpricing some jobs because of improper assignment of overhead costs. Some jobs are also being underpriced. Unfortunately, the jobs being overpriced are coming from our higher-volume, labor-intensive products, so we are losing business. Dong: I think I understand. Jobs associated with our high-volume products are being assigned more overhead than they should be receiving. Then when we add our standard 40% markup, we end up with a higher price than our competitors, who assign costs more accurately. Tonya: Exactly. We have two producing departments, one labor-intensive and the other machine-intensive. The labor-intensive department generates much less overhead than the machine-intensive department. Furthermore, virtually all of our high-volume jobs are labor-intensive. We have been using a plantwide rate based on direct labor hours to assign overhead to all jobs. As a result, the high-volume, labor-intensive jobs receive a greater share of the machine-intensive departments overhead than they deserve. This problem can be greatly alleviated by switching to departmental overhead rates. For example, an average high-volume job would be assigned 100,000 of overhead using a plantwide rate and only 70,000 using departmental rates. The change would lower our bidding price on high-volume jobs by an average of 42,000 per job. By increasing the accuracy of our product costing, we can make better pricing decisions and win back much of our private-sector business. Doug: Sounds good. When can you implement the change in overhead rates? Tonya: It wont take long. I can have the new system working within four to six weekscertainly by the start of the new fiscal year. Doug: Hold it. I just thought of a possible complication. As I recall, most of our government contract work is done in the labor-intensive department. This new overhead assignment scheme will push down the cost on the government jobs, and we will lose revenues. They pay us full cost plus our standard markup. This business is not threatened by our current costing procedures, but we cant switch our rates for only the private business. Government auditors would question the lack of consistency in our costing procedures. Tonya: You do have a point. I thought of this issue also. According to my estimates, we will gain more revenues from the private sector than we will lose from our government contracts. Besides, the costs of our government jobs are distorted. In effect, we are overcharging the government. Doug: They dont know that and never would unless we switch our overhead assignment procedures. I think I have the solution. Officially, lets keep our plantwide overhead rate. All of the official records will reflect this overhead costing approach for both our private and government business. Unofficially. I want you to develop a separate set of books that can be used to generate the information we need to prepare competitive bids for our private-sector business. Required: 1. Do you believe that the solution proposed by Doug is ethical? Explain. 2. Suppose that Tonya decides that Dougs solution is not right and objects strongly. Further suppose that, despite Tonyas objections, Doug insists strongly on implementing the action. What should Tonya do?arrow_forwardJackie Iverson was furious. She was about ready to fire Tom Rich, her purchasing agent. Just a month ago, she had given him a salary increase and a bonus for his performance. She had been especially pleased with his ability to meet or beat the price standards. But now, she found out that it was because of a huge purchase of raw materials. It would take months to use that inventory, and there was hardly space to store it. In the meantime, space had to be found for the other materials supplies that would be ordered and processed on a regular basis. Additionally, it was a lot of capital to tie up in inventorymoney that could have been used to help finance the cash needs of the new product just coming online. Her interview with Tom was frustrating. He was defensive, arguing that he thought she wanted those standards met and that the means were not that important. He also pointed out that quantity purchases were the only way to meet the price standards. Otherwise, an unfavorable variance would have been realized. Required: 1. CONCEPTUAL CONNECTION Why did Tom Rich purchase the large quantity of raw materials? Do you think that this behavior was the objective of the price standard? If not, what is the objective(s)? 2. CONCEPTUAL CONNECTION Suppose that Tom is right and that the only way to meet the price standards is through the use of quantity discounts. Also, assume that using quantity discounts is not a desirable practice for this company. What would you do to solve this dilemma? 3. CONCEPTUAL CONNECTION Should Tom be fired? Explain.arrow_forwardTypes of Responsibility Centers Consider each of the following independent scenarios: a. Terrin Belson, plant manager for the laser printer factory of Compugear Inc., brushed his hair back and sighed. December had been a bad month. Two machines had broken down, and some factory production workers (all on salary) were idled for part of the month. Materials prices increased, and insurance premiums on the factory increased. No way out of it; costs were going up. He hoped that the marketing vice president would be able to push through some price increases, but that really wasnt his department. b. Joanna Pauly was delighted to see that her ROI figures had increased for the third straight year. She was sure that her campaign to lower costs and use machinery more efficiently (enabling her factories to sell several older machines) was the reason why. Joanna planned to take full credit for the improvements at her semiannual performance review. c. Gil Rodriguez, sales manager for ComputerWorks, was not pleased with a memo from headquarters detailing the recent cost increases for the laser printer line. Headquarters suggested raising prices. Great, thought Gil, an increase in price will kill sales and revenue will go down. Why cant the plant shape up and cut costs like every other company in America is doing? Why turn this into my problem? d. Susan Whitehorse looked at the quarterly profit and loss statement with disgust. Revenue was down, and cost was upwhat a combination! Then she had an idea. If she cut back on maintenance of equipment and let a product engineer go, expenses would decreaseperhaps enough to reverse the trend in income. e. Shonna Lowry had just been hired to improve the fortunes of the Southern Division of ABC Inc. She met with top staff and hammered out a 3-year plan to improve the situation. A centerpiece of the plan is the retiring of obsolete equipment and the purchasing of state-of-the-art, computer-assisted machinery. The new machinery would take time for the workers to learn to use, but once that was done, waste would be virtually eliminated. Required: For each of the above independent scenarios, indicate the type of responsibility center involved (cost, revenue, profit, or investment).arrow_forward
- Emery Manufacturing Company produces component parts for the farm equipment industry and has recently undergone a major computer system conversion. Jake Murray, the controller, has established a troubleshooting team to alleviate accounting problems that have occurred since the conversion. Jake has chosen Gus Swanson, assistant controller, to head the team that will include Linda Wheeler, cost accountant; Cindy Madsen, financial analyst; Randy Lewis, general accounting supervisor; and Max Crandall, financial accountant. The team has been meeting weekly for the last month. Gus insists on being part of all the team conversations in order to gather information, to make the final decision on any ideas or actions that the team develops, and to prepare a weekly report for Jake. He has also used this team as a forum to discuss issues and disputes about him and other members of Emerys top management team. At last weeks meeting, Gus told the team that he thought a competitor might purchase the common stock of Emery, because he had overheard Jake talking about this on the telephone. As a result, most of Emerys employees now informally discuss the sale of Emerys common stock and how it will affect their jobs. Required: Is Gus Swansons discussion with the team about the prospective sale of Emery unethical? Discuss, citing specific standards from the code of ethical conduct to support your position. (CMA adapted)arrow_forwardSara has just taken a job as the middle school assistant principal for an area school district. Prior to Chis, she was a teacher. She has received the following performance measurements for her first administrative job. Her first order of business is to determine if these performance measurements are short-term goals or long-term goals based on her individual situation. She has completed her administrative degree but has not yet worked as an administrator. Identify each of the following goals as short term or long term. A. Conduct teacher walk-throughs/observations/evaluations for teachers of grades 6 and 7. B. Assist the districts mission in seeking to educate all youth in the school district. C. Train to become a building instructional leader. Act as building administrator in the absence of the principal. D. Attend meetings with building principals and the administrative team when called to do so. E. Engage all students in a meaningful way, and support teachers and staff in providing rigor and relevance. Success of school-wide discipline and attendance policies and enforcement depends on a combination of creativity and sound pedagogy while adhering to district, state, and federal law, guidelines, and regulations. F. Facilitate and supervise all federal- and state-mandated drills (fire, lockdowns, tornado, others). G. Dress professionally. H. Assist the building principal in all job duties and responsibilities.arrow_forwardTodd Lay just began working as a cost accountant for Enteron Industries Inc., which manufactures gift items. Todd is preparing to record summary journal entries for the month. Todd begins by recording the factory wages as follows: Then the factory depreciation: Todds supervisor, Jeff Fastow, walks by and notices the entries. The following conversation takes place: Jeff: Thats a very unusual way to record our factory wages and depreciation for the month. Todd: What do you mean? This is the way I was taught in school to record wages and depreciation. You know, debit an expense and credit Cash or payables or, in the case of depreciation, credit Accumulated Depreciation. Jeff: Well, its not the credits Im concerned about. Its the debitsI dont think youve recorded the debits correctly. I wouldnt mind if you were recording the administrative wages or office equipment depreciation this way, but Ive got real questions about recording factory wages and factory machinery depreciation this way. Todd: Now Im really confused. You mean this is correct for administrative costs but not for factory costs? Well, what am I supposed to doand why? a. Play the role of Jeff and answer Todds questions. b. Why would Jeff accept the journal entries if they were for administrative costs?arrow_forward
- Florenzo Corp. is a small manufacturing firm with 60 employees in seven departments. When the need arises for new workers in the plant, the departmental manager interviews applicants and hires on the basis of those interviews. The manager has each new employee complete a withholding form. The manager then writes the rate of pay on the W‐4 and forwards it to payroll. When workers arrive for their shift, they pull their time cards from a holder near the door and keep the time card with them during the day to complete the start and end times of their work day. On Friday, the time cards are removed from the holder and taken to payroll by any employee who is not busy that morning. If there were any pay rate changes for the payroll period due to raises or promotions, the manager calls the payroll department to inform payroll of these rate changes. Using the rate changes and the time cards, the payroll department prepares the checks from the regular bank account of Florenzo Corp. The manager…arrow_forwardRene Alverez knew she was in over her head soon after she took the job. Even so, the opportunity for promotion comes along rarely and she believed that she would grow into it. Ms. Alverez is the cost accounting specialist assigned to the finishing department of Standard Tool Company. Bill Sawyer, the manager of the finishing department, knows exactly what he is doing. In each of the three years he has managed the department, the cost per unit of product transsferred out of his Work in Process Inventory account has declined. His ability to control cost if highly valued, and it is widely believed that he will be the successor to the plant manager, who is being promoted to manufacturing vice president. One more good year would surely seal the deal for Mr. Sawyer. It was little wonder that Ms. Alverez was uncomfortable in challenging Mr, Sawyer’s estimate of the percentage of completion of the department’s ending inventory.He contended that the inventory was 60 percent complete, but she…arrow_forwardRene Alverez knew she was in over her head soon after she took the job. Even so, the opportunity for promotion comes along rarely and she believed that she would grow into it. Ms. Alverez is the cost accounting specialist assigned to the finishing department of Standard Tool Company. Bill Sawyer, the manager of the finishing department, knows exactly what he is doing. In each of the three years he has managed the department, the cost per unit of product transsferred out of his Work in Process Inventory account has declined. His ability to control cost if highly valued, and it is widely believed that he will be the successor to the plant manager, who is being promoted to manufacturing vice president. One more good year would surely seal the deal for Mr. Sawyer. It was little wonder that Ms. Alverez was uncomfortable in challenging Mr, Sawyer’s estimate of the percentage of completion of the department’s ending inventory.He contended that the inventory was 60 percent complete, but she…arrow_forward
- For the past 11 years, Elaine Wright has been an employee of the Star-Bright Electrical Supply store. Elaine is a very diligent employee who rarely calls in sick and staggers her vacation days throughout the year so that no one else gets bogged down with her tasks for more than one day. Star-Bright is a small store that employs only four people other than the owner. The owner and one of the employees help customers with their electrical needs. One of the employees handles all receiving, stocking, and shipping of merchandise.Another employee handles the purchasing, payroll, general ledger, inventory, and AP functions. Elaine handles all of the point-of-sale cash receipts and prepares the daily deposits for the business. Furthermore, Elaine opens the mail and deposits all cash receipts (about 30 percent of the total daily cash receipts). Elaine also keeps the AR records and bills the customers who purchase on credit.Point out any control weaknesses you see in the scenario. List some…arrow_forwardArcadia Plastics follows the philosophy of transferring employees from job to job within the company. Management believes the job rotation deters employees from feeling that they are stagnating in their jobs and promotes a better understanding of the company. A computer services employee typically works for six months as a data librarian, one year as systems developer, six months as a database administrator, and one year in systems maintenance. At that point, he or she is assigned to a permanent position. Required: Discuss the importance of separation of duties within the information systems department. How can Arcadia Plastics have both rotation and well-separated duties?arrow_forwardEthics and the Manager Tom Kemper is the controller of the Wichita manufacturing facility of Prudhom Enterprises. Inc. The annual cost control report is one of the many reports that must be filed with corporate headquarters and is due at corporate headquarters shortly after the beginning of the New Year. Kemper does not like putting work off to the last minute, so just before Christmas he prepared a preliminary draft of the cost control report. Some adjustments would later be required for transactions that occur between Christmas and New Year’s Day. A copy of the preliminary draft report, which Kemper completed on December 21, follows: Melissa Ilianovitch, the general manager at the Wichita facility, asked to see a copy of the preliminary draft report. Kemper carried a copy of the report to her office where the following discussion took place: Ilianovitch: Wow! Almost all of the variances on the report are unfavorable. The only favorable variances are for supervisory salaries and…arrow_forward
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