Question

Carmen Richter, the cost accountant for Hiland Power Machines, recently installed activity-based costing at Hiland's Miami riding mower plant where three models---the 8-horsepower Lightening Bolt, the, the 12-horsepower Speed Demon, and the 18-horsepower, Zinger--are manufactured. Carmen's new product costs for these three models show that the company's traditional costing system had been significantly undercosting the 18-horsepower Zinger. This was due primarily to the lower sales volume of the Zinger compared to the Lightening Bolt and the Speed Demon.

Before completing her analysis and reporting these results to management, Carmen is approached by her friend Elias Glean, who is the production manager for the 18-horsepower Zinger model. Elias has heard from one of Carmen's staff about the new product costs and is upset and worried for his job because the new costs show the Zinger to be losing, rather than making money.

At first, Elias condemns the new cost system, where upon Carmen explains the practice of activity-based costing and why it is more accurate than the company's present system. Even more worried now, Elias begs Carmen, "Massage the figures just enough to save the line from being discontinued. You don't want me to lose my job, do you? Anyway, nobody will know."

Carmen holds firm but agrees to recompute all of her calculations for accuracy before submitting her costs to management.

Instructions:

1. Who are the stakeholders in this situation?
2. What, if any, are the ethical considerations in this situation?
3. What are Carmen's ethical obligations to the company?  To her friend?

Answer 1

1. The stakeholders in this situation are the employees, the customers associated with the product, the investors, the management of the company.

2. The ethical considerations here are that a product costs are being reduced to avoid the product line from being discontinued. This is being done just to save Elias job which is not in the long term interests of the company. When the management and other stakeholders discover that the company has been running an unprofitable venture due to window dressing of cost assumptions it will impact the credibility of the business. Ultimately the product line will make losses which will bring down the overall profitability of the firm and this can hurt investor sentiment. Carmen and Elisa are violating the IMA code of ethics by putting their personal interests before the company's interests and creating a negative ethical culture.

3. Carmen;s ethical obligations to the company include the following:

(i) Credibility : All information must be communicated fairly and objectively. All relevant information that can influence the users judgement must be provided.

(ii) Integrity; Any personal conflicts of interest must be mitigated and refrain from any conduct that can result in prejudice to carrying out duties in an ethical manner.

(iii) Competence : A member has to ensure to provide any decision support information that is clear, accurate, concise and timely.

Carmen;s ethical obligations to his friend include advising her to avoid all potential conflicts of interest and that she must place professional integrity above all her personal interests. He has responsibility to guide her in following the professional code of ethics and that she must contribute to a positive ethical culture and must not engage in any act that may discredit the profession.