Tom Shanks, production manager for Innovative Products Ltd, had just finished his annual performance appraisal with the managing director, May Martin. May had indicated that, although Tom’s performance as production manager was satisfactory, she and other senior managers were concerned with the continuing high levels of production costs. As a result, Tom was informed that he would receive a smaller bonus this year as compared with the past. In this regard, May had remarked: ‘You will need to pay close attention to production costs over the next quarter. I am confident that your production costs will improve. You obviously need to get costs down a little. Why don’t you talk to the management accountant and work something out? If things improve we might be able to do something about that bonus.’

Tom approached the management accountant, Jerry Flynn, and explained his position in the following manner: ‘Jerry, I have just had lengthy discussions with May and we agreed that I should get together with you and work out ways of reducing production costs. I suggested several options, and May was very supportive. I have carefully examined costs assigned to production, and research and development costs and rent on the factory part of the total building complex cause me some concern. Both of these costs, which are fairly significant, are currently included in factory overheads and applied as production costs. Research and development is an ongoing cost but should be regarded as a period cost — likewise rent of the factory. I therefore propose that for the coming quarter these costs be excluded from overheads and be written off against revenues.’

Jerry responded that given the nature of the business and its emphasis on innovative products, he believed that research and development costs should be included in overheads. Likewise, he believed that factory rent was a product cost. He thought that perhaps he should discuss the proposal with May.

Tom then said: ‘I appreciate your position, Jerry, but, as I have said, May is supportive of my suggestions to reduce costs of production. She is very upset about this whole issue, and I would caution you about raising this subject with her again. It’s up to you to do your job as management accountant. I’m positive it will be okay.’

Required

A. Who are the stakeholders in this situation?

B. Discuss the ethical issue or issues involved in this situation.

C. What would you do if you were Jerry Flynn?