Managerial Accounting (5th Edition)
5th Edition
ISBN: 9780134128528
Author: Karen W. Braun, Wendy M. Tietz
Publisher: PEARSON
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Textbook Question
Chapter 6, Problem 6.75ACT
Ethics of building inventory (Learning Objective 6)
ETHICS
Fanfare Products, Inc., is a manufacturer of mobile devices. Kyle is the plant manager at Fanfare’s Toledo, Ohio, plant. The Toledo plant manufactures a smartphone, the Zoom, which has sold well for the past six months. Kyle is being considered for promotion to manager of the entire West Coast division of Fanfare Products. Bethany is an accounting supervisor at Fanfare Products and is a good friend of Kyle’s.
Kyle and Bethany are having lunch in the company cafeteria. There are about six weeks left in the current fiscal year. Kyle is concerned that his plant will be showing a loss rather than the healthy profit he had projected for the year. The reason for the shortfall is that demand has radically declined for the Zoom smartphone currently manufactured by Kyle’s plant. New smartphones with more features have been brought to market by Fanfare’s competitors. Engineers at Fanfare are currently working on an updated model of the Zoom, but it will not be ready for production in Kyle’s plant for another five months. If Kyle’s plant shows a loss this year, Kyle will not receive his performance bonus for the year. He also knows that his chance of promotion to the West Coast manager will be greatly reduced.
Bethany thinks about Kyle’s situation. She then shares with him a strategy that he can use to help increase his profits. She explains that under absorption costing, the more units in ending inventory, the more costs can be deferred. Using her tablet, she makes up a quick example in Excel to show him how he can turn his situation around and show operating income for the year.
Bethany’s first spreadsheet assumes that five units are produced and sold in this hypothetical situation:
6.7-79 Full Alternative Text
If five units are produced and sold, the hypothetical company would have a loss of $20. Now Bethany changes just one fact; instead of producing five units, the company in the example produces ten units. No other facts change—the company still sells just five units. Bethany shows Kyle the revised income statement under the increased production scenario:
6.7-80 Full Alternative Text
Under this second scenario, the operating income would be $30, which is quite a bit higher than the original scenario. Bethany again emphasizes that the only fact that was different between the two scenarios is that production, and therefore ending inventory, increased in the second scenario.
Bethany then urges Kyle to put on a major production push in the last month of the year. If he does, he will be able to push his income up to near projected levels. With the higher income, he will receive his annual performance bonus. In addition, he feels that his chances of getting the West Coast manager position are excellent.
Requirements
- 1. Using the IMA Statement of Ethical Professional Practice (refer to Exhibit 1-7) as an ethical framework, answer the following questions:
- a. What is (are) the ethical issue(s) in this situation?
- b. What are Bethany’s responsibilities as a management accountant?
- c. Has Bethany violated any part of the IMA Statement of Ethical Professional Practice? Support your answer.
- 2. What causes the shift from a loss to a profit in the hypothetical example?
- 3. What problems, if any, are caused by building inventories at year end?
- 4. What could Fanfare Products do to prevent future situations like the one described in this case?
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Chapter 6 Solutions
Managerial Accounting (5th Edition)
Ch. 6 - (Learning Objective 1) A graph of a variable cost...Ch. 6 - (Learning Objective 2) Which of the following is...Ch. 6 - (Learning Objective 2) In the cost equation...Ch. 6 - Prob. 4QCCh. 6 - Prob. 5QCCh. 6 - (Learning Objective 3) Which of the following is...Ch. 6 - Prob. 7QCCh. 6 - (Learning Objective 5) Which of the following is...Ch. 6 - Prob. 9QCCh. 6 - Prob. 10QC
Ch. 6 - Identify cost behavior (Learning Objectives 1 2)...Ch. 6 - Prob. 6.2SECh. 6 - Compute fixed costs per unit (Learning Objective...Ch. 6 - Prob. 6.4SECh. 6 - Predict and graph total mixed costs (Learning...Ch. 6 - Prob. 6.6SECh. 6 - Prepare and analyze a scatterplot (Learning...Ch. 6 - Prob. 6.8SECh. 6 - Use the high-low method (Learning Objective 4)...Ch. 6 - Prob. 6.10SECh. 6 - Prob. 6.11SECh. 6 - Prob. 6.12SECh. 6 - Write a cost equation given regression output...Ch. 6 - Prepare a contribution margin income statement...Ch. 6 - Prepare income statements using variable costing...Ch. 6 - Prepare income statements using variable costing...Ch. 6 - Identify cost behavior graph (Learning Objectives...Ch. 6 - Prob. 6.18SECh. 6 - Prob. 6.19SECh. 6 - Prob. 6.20AECh. 6 - Prepare income statement in two formats (Learning...Ch. 6 - Prob. 6.22AECh. 6 - Prob. 6.23AECh. 6 - Sustainability and cost estimation (Learning...Ch. 6 - Create a scatterplot (Learning Objective 3) Melody...Ch. 6 - Continuation of E6-25A: High-low method (Learning...Ch. 6 - Continuation of E6-25A: Regression analysis...Ch. 6 - Regression analysis using Excel output (Learning...Ch. 6 - Prob. 6.29AECh. 6 - Using the high-low method to predict overhead for...Ch. 6 - Using regression analysis output to predict...Ch. 6 - Performing a regression analysis to predict...Ch. 6 - Prob. 6.33AECh. 6 - Prob. 6.34AECh. 6 - Compare absorption and variable costing (Learning...Ch. 6 - Prepare a contribution margin income statement...Ch. 6 - Prepare a contribution margin income statement...Ch. 6 - Prepare income statements using variable costing...Ch. 6 - Prepare a variable costing income statement given...Ch. 6 - Prob. 6.40AECh. 6 - Prob. 6.41BECh. 6 - Prepare income statement in two formats (Learning...Ch. 6 - Use unit cost data to forecast total costs...Ch. 6 - Prob. 6.44BECh. 6 - Sustainability and cost estimation (Learning...Ch. 6 - Create a scatter plot (Learning Objective 3) Tammy...Ch. 6 - Continuation of E6-46B: High-low method (Learning...Ch. 6 - Prob. 6.48BECh. 6 - Prob. 6.49BECh. 6 - Prob. 6.50BECh. 6 - Using the high-low method to predict overhead for...Ch. 6 - Using regression analysis output to predict...Ch. 6 - Prob. 6.53BECh. 6 - Prob. 6.54BECh. 6 - Prob. 6.55BECh. 6 - Prob. 6.56BECh. 6 - Prob. 6.57BECh. 6 - Prob. 6.58BECh. 6 - Prob. 6.59BECh. 6 - Prepare a variable costing income statement given...Ch. 6 - Prob. 6.61BECh. 6 - Analyze cost behavior at a hospital using various...Ch. 6 - Analyze cost behavior (Learning Objectives 1, 2,...Ch. 6 - Prob. 6.64APCh. 6 - Prob. 6.65APCh. 6 - Prob. 6.66APCh. 6 - Analyze cost behavior at a hospital using various...Ch. 6 - Analyze cost behavior (Learning Objectives 1, 2,...Ch. 6 - Prepare traditional and contribution margin income...Ch. 6 - Prob. 6.70BPCh. 6 - Prob. 6.71BPCh. 6 - Prob. 6.72SCCh. 6 - Cost Behavior in Real Companies Choose a company...Ch. 6 - Ethics of building inventory (Learning Objective...Ch. 6 - Prob. 6.76ACT
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