Chapter 5, Problem 64C

Consider the following conversation between Leonard Bryner, president and manager of a firm engaged in job manufacturing, and Chuck Davis, certified management accountant, the firm’s controller.

Leonard: Chuck, as you know, our firm has been losing market share over the past 3 years. We have been losing more and more bids, and I don’t understand why. At first, I thought that other firms were undercutting simply to gain business, but after examining some of the public financial reports, I believe that they are making a reasonable rate of return. I am beginning to believe that our costs and costing methods are at fault.

Chuck: I can’t agree with that. We have good control over our costs. Like most firms in our industry, we use a normal job-costing system. I really don’t see any significant waste in the plant.

Leonard: After talking with some other managers at a recent industrial convention, I’m not so sure that waste by itself is the issue. They talked about activity-based management, activity-based costing, and continuous improvement. They mentioned the use of something called “activity drivers” to assign overhead. They claimed that these new procedures can help to produce more efficiency in manufacturing, better control of overhead, and more accurate product costing. A big deal was made of eliminating activities that added no value. Maybe our bids are too high because these other firms have found ways to decrease their overhead costs and to increase the accuracy of their product costing.

Chuck: I doubt it. For one thing, I don’t see how we can increase product-costing accuracy. So many of our costs are indirect costs. Furthermore, everyone uses some measure of production activity to assign overhead costs. I imagine that what they are calling “activity drivers” is just some new buzzword for measures of production volume. Fads in costing come and go. I wouldn’t worry about it. I’ll bet that our problems with decreasing sales are temporary. You might recall that we experienced a similar problem about 12 years ago—it was 2 years before it straightened out.

Required:

1. 1. Do you agree or disagree with Chuck Davis and the advice that he gave Leonard Bryner? Explain.
2. 2. Was there anything wrong or unethical in the behavior that Chuck Davis displayed? Explain your reasoning.
3. 3. Do you think that Chuck was well informed—that he was aware of the accounting implications of ABC and that he knew what was meant by cost drivers? Should he have been well informed? Review (in Chapter 1) the first category of the Statement of Ethical Professional Practice for management accountants. Do any of these standards apply in Chuck’s case?