Question

The controller of Tri Con Global Systems Inc. has developed a new costing system that traces the cost of activities to products. The new system is able to measure post-manufacturing activities, such as selling, promotional, and distribution activities, and allocate these activities to products in a manner that provides a more complete view of the company's product costs. This system produces better strategic information about the relative profitability of product lines. In the course of implementing the new costing system, the controller realized that the company's current period GAAP net income would increase significantly if the new product cost information were used for inventory valuation on the financial statements. The controller has been under intense pressure to improve the company's net income, and this would be an easy and effective way for her to help meet the company's short-term net income goals. As a result, she has decided to use the new costing system to determine GAAP net income.

Why does the company's net income increase when the new costing system is applied?

IS THE CONTROLLER ACTUNG ETHICALLY BY USING THEN NEWB COSTNG SYSTEM FOR GAAP NET INCOME ?

Answer 1

SOLUTION:-

First part of Question: Why does the company's net income increase when the new casting system is applied?

The new costing system will measure the post manufacturing activities and allocate these activities to products in such a way that the company' s product costs are clearly identified. This system also produced better straegic information about the relative profitability of product lines. This new system will avoid under or over absorption of expenses by the different product lines. This new system is akin to Activity Based Costing. a new way of accounting for indirect costs of manufacture between different products.

Second part of Question: Is the controller acting ethically by using the new costing system for GAAP net income?

Controller's action in this case amounts totally ethical. GAAP is not a legislation that needs to be followed it is only a Generally accepted accounting principle. If our new system improves the Company's net income, nothing prevents us from adopting it. Violating following GAAP is not illegal as it not a law. There is no legal binding on the company for implementing GAAP.

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