Ethic case oh rate

Where Should the Accountant Place His Loyalty?

Gabe Resnick had just moved into his new position of division controller of Adelco Products. He submitted his

calculation of next year's overhead rate and the division general manager asked to review his calculations. The general manager wanted to take advantage of the division's practice of writing off over or under applied overhead at year end in one lump sum to cost of goods sold. The general manager asked Gabe to reduce the estimate for direct labor hours used in the overhead rate calculation. Gabe had two bosses- the corporate controller and the division general manager. Gabe was torn between following the general manager's request or reporting the distortion to the corporate controller. Gabe Resnick thought he was settling into his new office and job as division controller at Adelco Products, a division of Steelcom Metals. Gabe was promoted from assistant accounting manger at corporate accounting to division controller at Adelco, which was the smallest division of seven divisions of Steelcom. Gabe has spent five years in a range of accounting jobs in general ledger, budgeting, and cost accounting at the corporate level. He was not sure he was ready for a division controller position, but he took comfort in the smaller, manageable size of Adelco and the support from the corporate controller's office. He was two weeks on the job, moving in and adjusting to his new job, and he had completed one assignment. It was late November and he was finishing work on the manufacturing overhead rate calculation for next year. Adelco followed corporate accounting policy and used direct labor hours as the basis for applying manufacturing overhead. Gabe estimated the total overhead by reviewing the growth rates for each of 20-line items (repairs, supplies, depreciation...) for the past 3 years. His estimate for next year's total overhead was $3,103,100. The budgeting process at Adelco was participative, that is, all department managers had a part in estimating and managing the yearly budget. Gabe asked the manufacturing manager for her estimate of direct labor hours needed for next year. Within a day she provided her estimate of 91,000 direct labor hours. Gabe took his overhead estimate and her estimate for direct labor hours and sent an email to the division general manager and corporate accounting with the final overhead rate: $3,103,100/91,000 hours or $34.10 per direct labor hour. Last November the overhead calculation was $2,986,000/86,800 = $34.40. Gabe's new estimate for overhead is 3.9% higher than last year, and the direct labor estimate is 4.8% higher than last year's estimate. The overhead rate calculation was important for costing the products produced and in setting product prices. A day after he submitted his overhead memo to the general manager, Bill Oliver, the general manager, requested a meeting with Gabe. A summary of their brief conversation: Oliver: How are you doing in the moving into the new position? Are all the division people welcoming and helpful? Gabe: Oh yes. Very warm welcome. It seems like a lot to learn about the division's activities, but it is a good career move for me. Oliver: I see you completed the overhead rate calculation for next year. We are right on schedule with the calculation and dissemination to the sales force for pricing. But I am asking a little favor from you. Could you lower the estimate for direct labor hours down to last year's actual hours? Gabe: I don't know if I can do that. I have the estimate for direct labor hours which are slightly higher than last year's actual. According to the accounting rules, I set the overhead rate and I can adjust the hours submitted to me. But why would I want to do that? Oliver: In my previous position as general manager I was able to deliver a small year-end present to corporate management with an adjustment for over or under applied overhead. Like Steelcom, that company made a year-end adjustment to cost of goods sold. It is not a big deal or as you accountants say, it is not material. Gabe was somewhat shaken from the request from the general manager. Steelcom had set up seven divisions as profit centers to manage the business. The main objective for the division was to deliver a profit. The general manager had overall responsibility and ran the division as though it were an independent company. Gabe had 2 bosses: a solid line reporting or main responsibility to the corporate controller and a dotted line reporting or secondary responsibility to the division general manager. He was responsible to the corporate controller for all the technical accounting issues: costing techniques, general ledger entries, control over all assets, etc. He had a support responsibility to the general manager in all accounting issues, especially the yearly budget. In his yearly review, the corporate controller would comment on Gabe's adherence to accounting requirements, and the general manager would comment on his support of the division efforts and activities. The corporate controller had primary responsibility for promotion and pay increases for Gabe, but the general manager was consulted for his opinion on these matters. Gabe quickly realized he had a serious dilemma. He had divided loyalty to 2 managers. Accounting issues to the corporate controller and local support to the general management of the division. He worried that if he reported this issue to the corporate controller he would be viewed as a snitch by the local management and immediately lose any influence with the division manager. If he did not report this issue to corporate and it was later discovered, he would be viewed as disloyal to his accounting responsibility and too submissive to local management. It looked like a no-win situation for him.

Questions:

1) Review the IMA (Institute of Management Accountants) code of conduct and determine which standards Gabe would violate if he followed the general manager's request.

2)What are the steps Gabe should follow in resolving this problem? Check the IMA code of conduct for suggestions.

3) Explain how the general manager's request results in a year-end present to corporate management. You can use journal entries to explain.

4) If adjustments for over or under applied overhead were made monthly instead of at year-end, would that schedule solve this problem?