Research on Managerial Accounting Ethical Issues

Topics: Cost accounting, Investment, Ethics Pages: 5 (1841 words) Published: May 10, 2013
While I was looking for an appropriate topic for research, I found an interesting publication, which fitted best to the subject (ethics in managerial accounting issues) and also included 5 good examples examples of possible problems associated with the field. The method of the study seemed unclear, especially considering the connection between the serial number of a dollar bill and the question to which the respondent had to answer in the end (in my work I will constantly refer back to the text, and in the end there will be a link to the document for review), though the examples given in the text seem to be really appropriate. Here’s the info about these 5 issues and the first one given: “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 “if the company uses the absorption costing approach, a manager might be tempted to produce unneeded units just to increase reported operating income.” An example of how profit was manipulated in this manner is provided by Kaplan and Atkinson (1998, p. 504), who mention a case where “the division manager had greatly increased production in quarters 2 and 3, with excess production accumulating as finished goods inventory. The much higher rates of production enabled period costs to be absorbed into inventory.”” That issue gives us an example of how managers can play with costs and overproduction in tension to make current net income higher while making costs per unit lower and, as a result, lower cost of goods sold, too. Such situation has ethical after-effect because it’s not always right to produce more than needed to meet demand. It’s not that dangerous to do this once, but overproduction can become a problem as the selling price can fall below the cost. Second issue is: “Issue #2: Cost Allocation

The second issue relates to the proposition by Rogerson (1992) discussed earlier, which noted that firms which have contracts with cost-based revenues have incentives to engage in unethical behaviour when it comes to allocating overhead costs. Specifically, Issue #2 involves arbitrarily changing cost allocations so that a higher amount of revenue can be obtained from a product sold on a cost-plus basis. According to Schneider and Sollenberger (2003, p. 4-19): “When the prices of certain services or products are cost based while others are market driven, managers are often tempted to shift much of the overhead costs to those cost-based services or products.” Similarly, Hilton et al. (2000, p. 375) state that “cost-plus contracts give incentives to the supplier of the good or service to seek as much reimbursement as possible and, therefore, to allocate as much cost as possible to the product for which...
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