A6-58 Ethics involved with choice of cost driver
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A6-58 Ethics involved with choice of cost driver
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Molly McDale is the controller for Roberts Manufacturing. It is a small company that manu-factures plastic lumber and is run by the owner and CEO, Franklin Roberts. At the end of the year, Roberts is reviewing the projected operating income for the company for the year. He tells McDale that the projected operating income is too low; if operating income is not at least $ 200,000, no holiday bonuses will be paid to employees, including McDale.
Hoping to find an error, McDale first of all rechecks the projected financial statements; she finds no errors. Since cost of goods sold is a large portion of Roberts’ expenses, she next ana-lyzes the components of cost of goods sold. The amount of direct material used ties directly to the physical inventory count, so there are no errors there. The direct labor dollars also tie directly to the payroll reports, eliminating another potential source of errors. She then looks at the way manufacturing overhead has been allocated to products. Traditionally, manufacturing overhead has been allocated to products based on direct labor hours because the manufacturing process for plastic lumber is labor intensive. McDale calculates manufacturing overhead based on machine hours used and finds that cost of goods sold will be $ 55,000 lower if manufacturing overhead is allocated based on machine hours rather than direct labor hours. The $ 55,000 difference, if booked, would cause net income to be $ 212,000, which means that bonuses would be paid to all employees. McDale knows that several factory employees are struggling and the holiday bonus would be much appreciated. In addition, McDale herself feels that she has earned the bonus over the past year because she has helped to implement several cost savings programs and has worked many long days with-out overtime pay.
Requirements
1. Using the IMA Statement of Ethical Professional Practice as an ethical framework, answer the following questions:
a. What is ( are) the ethical issue(s) in this situation?
b. What are McDale’s responsibilities as a management accountant?
2. Discuss the specific steps McDale should take to resolve the situation. Refer to the IMA Statement of Ethical Professional Practice in your response.