Continue from the my first post:-

Question: Unit VI Reflection Paper BUS 3620,

Managerial Accounting 2

Full Text:

INTRODUCTION

Robert had no idea how much his life was about to change. He thought he had acquired a "forever" career with a financially strong company. What he had not considered, though, was the effect his new supervisor could have on his career. Robert Gonzales was a 28-year-old CMA and CPA who had recently become a member of the Institute of Management Accountants (IMA) and the American Institute of Certified Public Accountants (AICPA). He was in his first year of being employed at a vehicle manufacturing facility. For years, the plant had prided itself in its multiple lines including both compact cars and sport utility vehicles (SUVs). His supervisor, Gail Smith, was also a CMA and CPA. She had been with the company six months. Robert, having consulted with the company's former CPA, was aware the business had always used absorption costing for external reporting purposes as required by U.S. Generally Accepted Accounting Principles (GAAP). Income for internal reporting, though, had been calculated based on variable costing, and it was those numbers that were used for employee compensation and end-of-year bonuses. Those were the all-important numbers to most of the employees and especially to Gail.

Who wouldn't want to find a way to boost company income and get a few extra zeros added to one's paycheck, right? It was, therefore, no surprise that Gail, being the clever CPA that she was, decided to "test" the options herself. It was the perfect opportunity. Robert was relatively new to the company and to the profession itself. Gail was fairly confident that Robert would be more than willing to listen to her. She was his supervisor, but, more than that, during the few months that she had known him, he had always been eager to listen to her suggestions and to openly demonstrate his admiration for her and her many years of experience. Being fully aware of GAAP requirements, she knew there was nothing she could alter in the external realm. She definitely did not want to arouse any suspicion among the auditors. It was those internal reports that were uppermost on her mind when she sat in her office on that November afternoon. After laboring over the numbers for hours, it finally hit her. There were two costing options, variable and absorption. She was new to variable costing for internal decision making. Previous organizations for which she had worked had considered the method, but they all had ultimately chosen against it. Aha! She had found her income inflation opportunity! When using GAAP based absorption costing as compared to internally used variable costing, if more was produced than sold, then there was a chance for income manipulation. She was not only Robert's supervisor but also one of three main managers at the plant. She was, thus, partially in charge of deciding on an appropriate production level every quarter. Luckily for Gail, the other two managers were not as financially adept as she was. They would never have any clue that she was inflating income.

The economy had been poor lately and that, coupled with soaring gas prices, had caused SUV sales to decline significantly over the past three months. It was another perfect opportunity. Could things get any better than this, thought Gail?

Over the next few weeks, Gail worked tirelessly to craft fail-proof arguments in favor of keeping SUV production constant despite the recent lack of adequate sales in that line. Then the day came to use her verbal arsenal. She met early that day with the other two managers and, going down her, by then, overflowing list of "unsound" arguments that she had creatively spun to her benefit, she won the other managers over. Her self-claimed theory that the economy would soon be flourishing and that future gas prices would drop so low that even the most non- traveler type would hit the pavement to see the back roads of the country in an instant was accepted by her colleagues easier than she had ever imagined. It was time to move on to Robert.

That afternoon she called Robert into her office. She explained to him about the decision to keep production of SUVs steady despite the current sales predicament. He was surprised and confused, but nonchalantly shrugged it off. What did he know? He was just a first-year entrant into the auto industry. Maybe there was something he was missing, something that a little more experience would have revealed. It was not until Gail began to mention something about eliminating the use of variable costing for internal purposes that he became suspicious. She told him that nothing would be changed in the externally submitted financials, but that she felt that it would be best for company decision making if the internal reporting techniques were altered slightly. Robert was open to change, but what Gail was suggesting was not exactly a "slight" change. He had remembered one of his professors dwelling on how changing from variable to absorption costing could cause a significant change in reported income, especially if there was an overabundance of inventory, and it was that same professor who had warned him and his classmates to watch out for such manipulation in their professional lives. But that could not be what was going on here, could it? Gail had only worked for the plant a short time herself, but she still seemed to make decisions in the best interests of the company. He continued to listen to her ideas and suggestions, but refused to agree to any specific method until, as he told her, he had time to conduct further evaluation of the proposals.

Exposure by Robert to more diligent accounting instruction and ethical awareness was not a variable that Gail had factored into her plan. She realized that her simply fashioned arguments, which had worked so well on her fellow managers, would not be sufficient to make Robert a believer. If she wanted her plan to work, she was going to have to amend her arguments so that they had less of a financial foundation. Robert was an astute accountant; she could see that now. To successfully convince him, she recognized that she was going to have to use his lack of industry knowledge to her advantage.

In the days following his encounter with Gail, Robert spent every free moment he had evaluating his supervisor's suggestion. He thought about it and plugged in numbers time and time again trying out various scenarios, and each time it came out the same way. When production remained constant but sales declined, the use of absorption costing as opposed to variable costing resulted in higher reported income. More than ever, he started to believe that it just was not his industry inexperience that was causing him to be leery of the proposed production increases. Maybe it was not sound industry policy at all.

He decided to investigate further into Gail's employment history. He had been on her screening committee six months earlier and her resume was in his desk drawer. As he scanned the document, he noticed something intriguing: She had only been employed at her last company for a little over a year. Because she had only been there a short while, Robert had surmised that perhaps she was one of those job jumpers who went from job to job using her financial and accounting know-how to get what she wanted from the company and would leave before anyone was able to catch on to her scheme. By that time, though, the company would be reeling from the countless bad and irreversible decisions it made based upon the information she persuaded management to believe to be correct. Keeping such thoughts in the back of his mind, he decided to inspect the resume further. The next previous job listed indicated Gail had been with that company a mere four months. The other listed jobs were also accompanied by ranges of work dates that were not typical of the profession. Jackpot, thought Robert! There had been similar information flowing through the organization's grapevine, and the records had proved it. The short employment span being related to any deceptive practice was just a gut feeling on Robert's part, but it was an instinct that he felt very strongly about.

To further support his convictions, he decided to dig around for his old accounting textbooks. Sure enough, his cost accounting text illustrated a similar example. The text's evaluation and his own matched. But, why, he asked himself, would Gail want to boost internally reported income? Then it hit him. At the end of each fiscal year, the internally reported figures were reviewed, and based upon the numbers and their changes from the previous year, decisions were made to issue or reject bonuses. Gail must be at it again, he thought; she has been here only six months, but she clearly is directing the company in the wrong direction yet again in order to fulfill her own objectives. Further pondering the situation, he continued and exclaimed out loud, "She must be interested in some extra cash for herself," then thinking about it a bit more, "and it would not really be bad for the rest of us either."

Going along with the plan, though, would cause the other managers to make decisions that would differ from those that would be made if the more proper variable costing method were used. Those decisions would include the choice to continue manufacturing SUVs at a constant level even though they clearly were not as profitable as any absorption-based numbers would indicate. He knew that allowing such a misconception would be wrong, but it would help him and all the other employees who had families to support. He was in a bad situation, and he knew it. It was the type of situation that he had often dreamed and feared about during his preparations to become an accountant and then even more so when he had pursued the Certified Public Accountant (CPA) and Certified Management Accountant (CMA) designations. He had promised to take the CPA and CMA ethical codes of conduct as his own and now his supervisor's directives and those very codes were in conflict.

Gail, still up to her old tricks, had been working on non-financial arguments to present to Robert in hopes she could still convince him that absorption costing and the production changes were superior to any other choice that the company could possibly make. In her conversation with Robert, she noted that the SUV was the company's legacy and for that matter, was the legacy of the American auto industry. The company could not just decrease production of such a popular line of vehicles even if gas prices were off the charts. Demand would always be there, she argued. As she stated, the whole notion of "going green" was just another fad that would vanish as soon as the economy recovered. With the emergence of a new U.S. President who advocated a comprehensive economic stimulus plan, she further declared that such a positive fiscal state looked more promising than ever. To provide support for the absorption costing method, she contended that absorption costing was good enough for external reporting why should it not be equally sound and acceptable for internal reporting as well. Inside she knew fully well why, in this and many other cases, it would not be acceptable, but she had done it so many times before, it had become nothing for her to be untrue to herself and the ethical codes of her designations. Still, she could see it in Robert's skeptical eyes. Could this be the time when she finally met her match and would be caught in the act?

Gail interpreted Robert's reactions correctly. He was absolutely on to her. Now it was just up to him to decide what to do. He created a spreadsheet based on one set of his previous calculations. To make things simple and to provide an analysis that the other managers might be able to at least conceptually understand, he decided to establish fixed overhead at $150 per unit based on an estimated overhead and production of $15,000,000 and 100,000 units, respectively. His estimated figure for direct materials would be $100 per unit, direct labor would be $200 per unit, and variable manufacturing overhead would be $50 per unit. He created comparison budgets for three different levels of sales for SUVs based upon those costs. The absorption portion of that budget is presented in Table 1. He gathered together the remaining support and his counterarguments. All that was left was to decide if he was going to pursue his gut feeling or allow Gail to follow through with her plan once again.

Robert has a meeting with the other managers in two days to discuss his progress with the company. It is an ideal opportunity to disclose his findings. Having only been employed at the company for six months, he is not sure how his allegations and concerns will be received. He and the other employees could be monetarily rewarded if he does not say anything. If he does openly question Gail's tactics with her superiors, his job could potentially be at stake.

Geri B. Wink, Colorado State University--Pueblo

Laurie J. Corradino, Colorado State University--Pueblo