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 (in the prologue of the text), discuss what the ethical issues are in this situation? What are Game's responsibilities as a management accountant?

Answer 1

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.

PRODUCT COSTS (ALSO KNOWN AS INVENTORIABLE COSTS) ARE THOSE COSTS THAT ARE INCURRED TO ACQUIRE OR MANUFACTURE A PRODUCT. FOR A MANUFACTURING COMPANY, THESES COSTS USUALLY CONSIST OF DIRECT MATERIALS, DIRECT LABOR, AND MANUFACTURING OVERHEAD.

PRODUCT COSTS ARE INITIALLY TREATED AS INVENTORY AND DO NOT APPEAR ON INCOME STATEMENT UNTIL THE PRODUCT FOR WHICH THEY ARE INCURRED IS SOLD. WHEN THE PRODUCT IS SOLD, THESE COSTS ARE TRANSFERRED TO COST OF GOODS SOLD ACCOUNT. FOR EXAMPLE, IF A COMPANY MANUFACTURES 50 UNITS OF PRODUCT X AND SELLS ONLY 30 UNITS IN 2013. THE DIRECT MATERIALS, DIRECT LABOR AND MANUFACTURING OVERHEAD COSTS INCURRED TO MANUFACTURE THESE 50 UNITS WILL BE INITIALLY TREATED AS INVENTORY (AN ASSET). THE INVENTORY OF 30 UNITS WILL BE TRANSFERRED TO COST OF GOODS SOLD DURING THE YEAR 2013 AND APPEAR ON THE INCOME STATEMENT OF 2013. THE REMAINING INVENTORY OF 20 UNITS WILL NOT BE TRANSFERRED TO COST OF GOOD SOLD IN 2013.

THE COSTS THAT ARE NOT INCLUDED IN PRODUCT COSTS ARE KNOWN AS PERIOD COSTS. USUALLY, THESE COSTS ARE NOT PART OF THE MANUFACTURING PROCESS AND ARE THEREFORE TREATED AS EXPENSE FOR THE PERIOD IN WHICH THEY ARISE.

PERIOD COSTS ARE NOT ATTACHED TO PRODUCTS AND COMPANY DOES NOT NEED TO WAIT FOR THE SALE OF PRODUCTS TO RECOGNIZE THEM AS EXPENSE. ACCORDING TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP), ALL MARKETING, SELLING AND ADMINISTRATION COSTS ARE TREATED AS PERIOD COSTS. EXAMPLES OF THESE COSTS INCLUDE OFFICE RENT, INTEREST, DEPRECIATION OF OFFICE BUILDING, SALES COMMISSION AND ADVERTISING EXPENSES ETC.

WHEN PRODUCTS ARE SOLD, THE PRODUCT COSTS BECOME PART OF COSTS OF GOODS SOLD AS SHOWN IN THE INCOME STATEMENT. PERIOD COSTS ARE ALL COSTS NOT INCLUDED IN PRODUCT COSTS. PERIOD COSTS ARE NOT DIRECTLY TIED TO THE PRODUCTION PROCESS. OVERHEAD OR SALES, GENERAL, AND ADMINISTRATIVE (SG&A) COSTS ARE CONSIDERED PERIOD COSTS.