Chapter 3, Problem 3.60ACT

Ethics involved with choice of cost driver (Learning Objectives 2, 3, & 4)

ETHICS

Vicki Thornton is the controller for Jackson Manufacturing. It is a small company that manufactures plastic lumber and is run by the owner and CEO, Franklin Jackson. At the end of the year, Jackson is reviewing the projected operating income for the company for the year. He tells Thornton that the projected operating income is too low; if operating income is not at least $250,000, no holiday bonuses will be paid to employees, including Thornton.

Hoping to find an error, Thornton first rechecks the projected financial statements; she finds no errors. Since cost of goods sold is a large portion of Jackson’s expenses, she next analyzes the components of cost of goods sold. The amount of direct material used ties directly to the physical inventory count, so there are no errors there. The direct labor dollars also tie directly to the payroll reports, eliminating another potential source of errors. She then looks at the way manufacturing overhead has been allocated to products.

Traditionally, manufacturing overhead has been allocated to products based on direct labor hours because the manufacturing process for plastic lumber is labor intensive. Thornton calculates manufacturing overhead based on machine hours used and finds that cost of goods sold will be $55,000 lower if manufacturing overhead is allocated based on machine hours rather than direct labor hours. The $55,000 difference, if booked, would cause net income to be $262,000, which means that bonuses would be paid to all employees. Thornton knows that several factory employees are struggling and the holiday bonus would be much appreciated. In addition, Thornton herself feels that she has earned the bonus over the past year because she has helped to implement several cost savings programs and has worked many long days without overtime pay.

Requirements

1. 1. Using the IMA Statement of Ethical Professional Practice as an ethical framework, answer the following questions:
   1. a. What is(are) the ethical issue(s) in this situation?
   2. b. What are Thornton’s responsibilities as a management accountant?
2. 2. Discuss the specific steps Thornton should take to resolve the situation. Refer to the IMA Statement of Ethical Professional Practice in your response.