Question

A manufacturing company allows employees to purchase, at cost, manufacturing materials such as metal and lumber, for personal use. To purchase materials for personal use, an employee must complete a materials requisition form which then must be approved by the employee's immediate supervisor. The assistant cost accountant then charges the employee an amount based on the manufacturing company's net purchase cost.

An employee, who happens to be the assistant cost accountant, is in the process of replacing a deck on his home and has requisitioned lumber for personal use, which has been approved in accordance with company policy. In computing the cost of the lumber, the employee (the assistant cost accountant) reviewed all the purchase invoices for the past year. The employee then used the lowest price to compute the amount due for the company for the lumber.

Discuss whether this is a good company policy, include if there are proper internal controls in place. Discuss if the assistant cost accountant behaved in an ethical way. Discuss if there should be any type of corrective action. How should the company management handle this situation? Feel free to share any situations that sound similar in the real world.

Answer 1

Answer

The policy lacks in internal controls to check potential misuse by the employees. First, the company shoud clearly define the price at which materials shall be transferred to the requested employees, i.e., the cost flow assumption should be clearly defined for the policy to be effective.

Here it seems that the proper internal control is not to be followed because reason being is simple that there is no guideline regarding usage & purchase of materials by the employees. Also, the cost accountant itself is purchasing the product and is responsible for ascertaining the cost of the same, hence we can clearly see that there is a lack of robust internal control system.

Second, the employee requesting for materials should not be the same as the employee preparing the invoice after transferring the materials as it could lead to misuse of the provision.

The assistant cost accountant has clearly violated the ethics by exploiting his position to gain an unfair advantage by billing lower cost to himself..He/she surely did not behave in ethical manner since he/she deliberately ascertained the lower cost than the actual cost, this is an unethical behaviour.

Yes, there needs to be a corrective action, first of all there has to be a proper guidelines regarding such purchase also the there has to be one uniform price to be charged by the company across all the employees irrespective of the current cost this will help in handling the situation of wrong estimation of the cost. There has to be robust internal control system that will check whether employees are not misusing this facility given to them.