Question

It is the end of the fiscal year for Company A, a manufacturing company. Looking at the projected income for the year, it looks like income will be too low for anyone to get bonuses. The controller, Shelly Game', is looking over accounting records to make sure that everything is correct for annual income statements. Currently, the accounting department has $50,000 of depreciation expenses associated with computer hardware and software used to calculate product cost, WIP, FGI, and COGS. Since this is part of Accounting expenses, these costs are classified as period costs and recorded as part of Selling and Administrative expenses. Game' is considering proposing that these costs be classified as manufacturing overhead rather than period costs. This change would move these costs to FGI, and make income for the year high enough for employees to get bonuses. Looking at the IMA Statement of Ethical Professional Practice, discuss What the ethical issues are in this situation? What are Game's responsibilities as a management accountant?

Answer 1

In the given situation, the depreciation expenses associated with computer hardware and software used to calculate product cost, WIP, FGI, etc. are recorded as Selling and Administrative expenses. However, the controller is of the opinion that the same has to be recorded as manufacturing expenses.

The depreciation expenses are period costs, unless the depreciation is associated with any equipment exclusively used for the production of specific product. If the depreciation relates to the equipment in factory, it can be recorded as manufacturing overheads. In the given case, it cannot be recorded as manufacturing overheads as the computer is not exclusively used for the purpose of production.

In this situation, if Game follows the accounting principles and records the same as period costs, the profit is reduced leading to non-payment of bonus which may impose threat on his job.

If he changes the classification and records the same as manufacturing overheads, the profits will be higher and bonus can be paid. However, it results in misstatements in financial statements which is punishable offence.

The ethical issue being faced here by Game is whether to follow his professional responsibility or the responsibility as an employee.

Game’s responsibilities as a management accountant are:

• To provide report - Management accounting keeps the management fully informed about the latest position of the concern through reporting. It helps management to take proper and quick decisions. It informs the performance of various departments regularly to the top management.
• To formulate planning and policy - Planning involves forecasting on the basis of available information, setting goals; framing polices determining the alternative courses of action and deciding on the program of activities
• To interpret the financial statements - Management accounting is to present financial information to the management. Financial information must be presented in such a way that it is easily understood.
• To assist in decision-making process - Management accounting makes decision-making process more scientific with the help of various modern techniques. Information/figure relating to cost, price, profit and savings for each of the available alternatives are collected and analysed accordingly which will provide a base for taking sound decisions