O'Brian & McKinney (OM) is a public relations (PR) firm that represents elite athletes and celebrities. Tom O'Brian and Kate McKinney founded the firm in 2000, and since then the firm has grown dramatically. As of July 2017, OM's annual revenue exceeds $8 million dollars. Lately, the business has been under pressure. Competition has increased, and multiple PR firms have entered the space. Cash flow is very tight, and profit margins are lower than the industry average. During 2017 OM has lost 9 important clients and the relationship between Kate and Tom is very tense, since Tom is advocating for personnel reduction, while Kate is not. On Thursday, November 16 of 2017 at around 4:40 PM, Kate McKinney just ended a difficult conversation with Russell Brady (2017 NFA MVP). Russell is very upset and expressed that he is inclined to end his relationship with OM, since he argues that he has been overcharged. OM billed Russell more than $50,000 for September & October 2017 and Russell thinks this is an excessive amount since other quarterbacks pay $30,000 or less for similar services. Kate assures Russell that she will investigate to find out what is happening. John Goodfellow is the Account Executive in charge of Russell's account and Kate is concerned that John might have been overbilling Russell. She looks at the hours billed to Russell and concludes that they are reasonable, and comparable to other players; so, she decides to talk to the Controller, Mr. Loveless, to see if he can explain. When she gets to the Accounting Department Kate finds that the Controller is already gone for the day, and the only person still working at the Accounting department is young new hire: Dinesh Kumar. She introduces herself to Dinesh and explains that she needs to understand why Russell Brady is being charged so much since the number of hours billed is comparable to other clients who do not get charged as much. Dinesh tells her that he will work on it immediately and promises an answer by the next day, Friday morning. Early morning on Friday, November 17, Tom O'Brian had a great conversation with Colin Bennet who called to renew his contract with O'Brian & McKinney. Collin has been going through a difficult situation since he has chosen not to stand for the National Anthem ceremony that occurs before each game. Collin position is to draw public attention to recent incidents of police brutality against African Americans, and his stance has created a lot of controversy. Colin is very happy with OM's representation which has been very effective at managing all the press that his actions have generated. Danielle Chen, is the Account Executive managing Collin's account and Tom wants to promote Danielle and give her a performance bonus. Soon after, at 11:30am, Tom learns through his assistant that Russell Brady has been talking to other PR firms. Tom is concerned, since he hasn't heard anything from Kate. Tom calls Kate and demands an explanation. Kate explains that she is expecting a report from the Accounting Department and that she will discuss at the partners' meeting later that day at 2:00pm. Tom demands that Kate fire John immediately and that the account be transferred to him so that Danielle Chen can take over, since Danielle had been successfully managing Colin's Bennet account. Kate responds that she would like to wait until she gets all the information before she fires anybody. Tom reluctantly agrees. Dinesh worked through the night. He found that his boss (the Controller: Mr. Loveless) had been using a very simple indirect costing system based on a single direct-cost category (professional labor-hours) to allocate overhead (OH). Dinesh decided to look at the indirect costs more closely applying an activity based costing (ABC) allocation system. After running the numbers, he was shocked. It was clear that the entire costing/billing system was very flawed, and that Russell Brady had been overcharged while Colin Bennet had been under-charged. Mr. Loveless found out about what Dinesh had been doing and went to Dinesh to ask him why he hadn't been notified. He looked at the report and he was furious, since he had been working at OM for more than 15 years and he was sure that the costing/billing was correct. Mr. Loveless told Dinesh to stop communicating with Kate since he wanted to take care of the matter. Soon after, Kate called and Dinesh explained that there were some problems with the costing and billing system and that this had caused the over-charging. Kate interrupted Dinesh and told him that he needed to come to the Partners meeting and report on the billing of Russell Brady and Colin Bennet to Tom as well. She explained that the issue was very important since the firm was contemplating firing John Goodfellow because they could lose Russell Brady's account who believed that he has been overcharged; while promoting Danielle Chen who had done a great job. It was 1:30pm and Dinesh was super nervous and didn't know what to do. Should he communicate his findings to anyone? And if so, what should his message be? Should he attend the meeting ignoring the instructions of his boss? He knew that Tom would not like the report and that Mr. Loveless would be furious. He also knew that John Goodfellow would lose his job and that Russell Brady would leave the firm if he didn't do something. He never thought that his job would involve so much drama and controversy. What to do? Table 1 Direct Costs for September & October, 2017 Rate Russell Brady Direct Labor(DL): Professional $130/hr. 125 hrs. Collin Bennet 125 hrs. Table 1 shows the direct costs of professional labor costs for Russell Brady and Colin Bennet. The estimated professional hours (DL) for 2017 are 12,500 hrs. Table 2 shows the total estimated indirect costs (OH) costs for OM for 2017. Indirect costs had been allocated based on DL hours. Table 2 Budgeted Indirect (OH) Costs for 2017 Total Estimated Indirect Costs Research & Admin support 990,000 8000 hrs. Technology 200,000 2000 hrs. Travel 900,000 30000 miles Travel allowance 475,000 2500 days Tech support 245,000 4000 hrs. Office Space 1,500,000 5200 ft2 Entertainment and meals 500,000 5000 meals Photocopying & materials 300,000 1200 client months Total Estimated Overhead Costs $5,110,000 Table 3 shows the actual OH costs for Russell and Colin for the months of September and October. Dinesh thought about all the people directly and indirectly affected by this costing/pricing controversy. Table 4 illustrates the employees and clients directly affected, but he recognized that the firm as well as many more individuals could be indirectly affected too. Table 3 Actual Indirect (OH) Costs for September & October, 2017 Total Russell Brady Collin Bennet Indirect Costs Research & Admin support $22,000 30 hrs. 128 hrs. Technology $6,200 25 hrs. 42 hrs. Travel $67,000 500 miles 1650 miles Travel allowance $5,750 5 days 25 days Tech support $1,600 8 hrs. 17 hrs. Office Space $12,400 23 sq. feet 20 sq. Feet Entertainment and meals $4,200 10 meals 35 meals Photocopying $2,000 $150 $1,850 Actual Total Overhead Costs $121,150 Name Tom O'Brian Kate McKinney Russell Brady John Goodfellow Mr. Loveless Dinesh Kumar Collin Bennet Danielle Chen Table 4 Characters Roles Co-founder of O'Brian & McKinney (OM) Co-founder of O'Brian & McKinney (OM) Important and unhappy client Account Executive in charge of Russell Brady's account Controller (Dinesh's Boss) New hire accountant Happy client Account Executive in charge of Collin Bennet's account Socio-economic: "Does our policy violate the right of some of our citizens to make their own choices? TRUST Individual: "Are my actions compromising the possibility that this person would trust me in the future?" Organization: If I betray someone on the team I manage, will that harm my ability to be an effective leader in the future?" Socio-economic: Does this policy make it less likely that some people will go to the police?" VIRTUE - Individual: "If I falsify the numbers on this report in order to make it look like I met my yearly goals, will lying become part of who I am?" Organization: "Does the culture of our organization make it more likely that our employees will do the right thing? - Socio-economic: "What kind of society do we want to have? say, "that's not fair" or "that hurt my feelings" they are beginning to think about how ethical values apply to real life. But doing ethics well is not always easy - and sometimes it is quite difficult. There are three things that make it difficult: - It may be difficult to identify how a particular value applies in a particular situation. - There are times when we must make trade-offs between the values. There are also times when we must consider trade-offs between multiple individuals or groups. For example, your city is considering passing a law will help one group, but the very same law will harm another group. When these difficult situations occur, there is no formula for solving them. We must use our critical thinking abilities and engage in discussions with others in order to find the best course of action. Values at Different Levels A second complication is that these values apply at different levels, since we could be considering individuals, or organizations, or entire societies. Below I have given one example of how each of the five values works at each level. EQUALITY Individual: Do my actions show that I believe that my interests are more important than this other person's interests?" Organizational: "Does everyone of similar work experience on our sales team have a fair chance at that promotion? Socio-economic: "Does our society have social structures that make success more difficult for one group than another?" HARM AVOIDANCE - Individual: Are my words offensive to this other person?" - Organizational: "When our employees complain about harassment, do we have policies that allow us to address their concerns quickly and respectfully?. Socio-economic: "Does our government use symbols that are hurtful for some of our citizens?" AUTONOMY - Individual: "Am I mistreating or deceiving this person so that I can get what I want?" - Organizational: "Are we mislabeling our product as "good for the environment" with the hope that our customers will choose to purchase it? 2. Answer the following question: (a) In addressing (i) and (ii), your task is to decide what Dinesh should do. If Dinesh decides to attend the meeting, consider the organizational impact of discussing his analysis with Kate and Tom. (i) If you were in Dinesh's position; would you attend the Partner's meeting (where you would be asked to present your report to Kate and Tom)? Please list the pros and cons of attending or not attending the meeting? (ii) Assume that Dinesh attended the meeting and explained to Kate and Tom the significance of differences between using one cost-driver versus using ABC costing to allocate OH. What course of action should OM take? Explain alternatives and conclude with your position. Try to be specific and address the consequences to all stakeholders involved (Russell, Colin, Danielle, John, Mr. Loveless, the rest of the Account Executives, Dinesh and so forth). (b) A day later, after examining Dinesh's report, Tom decides to fire John, promote Danielle, reduce the billings of Russell, and continue allocating OH using a single cost driver (professional hours). Kate calls Dinesh and tells him what is going to happen. Should Dinesh do something? Why or why not? In your discussion make reference to the value framework in Appendix A. Your response should be a page long. For part (a), please include a chart that compares both methods (one cost driver vs. ABC). Table 1: Analysis and effect of OH allocation Direct labor (prof. hrs.) Total costs Based on OH allocation using professional hrs. Russel Brady Collin Bennet OH ABC OH allocation Russel Brady Collin Bennet Please also include a table to evaluate pros and cons. Table 2: Pros & Cons of attending meeting PROS (positive) 1 3 CONS (negative) Please also include a table of the consequences of adopting ABC. Impact of allocating OH using ABC Russell Colin Danielle Mr.Loveless Dinesh 7 Other employees O'Brian & McKinney (OM) 2 For part (b), please state what should Dinesh do if OM decides to keep using the company-wide OH (single cost driver) allocation base. Should he: ask for another meeting (maybe John did not understand the report), resign, tell John, etc. Once you decide on a course of action, justify your decision using the Ethical Value Framework. Dinesh should i ne ethical consequences will be: Increase his Autonomy: How? Increase the happiness of Increase the equality of Increase the trust of O'Brian & McKinney (OM) is a public relations (PR) firm that represents elite athletes and celebrities. Tom O'Brian and Kate McKinney founded the firm in 2000, and since then the firm has grown dramatically. As of July 2017, OM's annual revenue exceeds $8 million dollars. Lately, the business has been under pressure. Competition has increased, and multiple PR firms have entered the space. Cash flow is very tight, and profit margins are lower than the industry average. During 2017 OM has lost 9 important clients and the relationship between Kate and Tom is very tense, since Tom is advocating for personnel reduction, while Kate is not. On Thursday, November 16 of 2017 at around 4:40 PM, Kate McKinney just ended a difficult conversation with Russell Brady (2017 NFA MVP). Russell is very upset and expressed that he is inclined to end his relationship with OM, since he argues that he has been overcharged. OM billed Russell more than $50,000 for September & October 2017 and Russell thinks this is an excessive amount since other quarterbacks pay $30,000 or less for similar services. Kate assures Russell that she will investigate to find out what is happening. John Goodfellow is the Account Executive in charge of Russell's account and Kate is concerned that John might have been overbilling Russell. She looks at the hours billed to Russell and concludes that they are reasonable, and comparable to other players; so, she decides to talk to the Controller, Mr. Loveless, to see if he can explain. When she gets to the Accounting Department Kate finds that the Controller is already gone for the day, and the only person still working at the Accounting department is young new hire: Dinesh Kumar. She introduces herself to Dinesh and explains that she needs to understand why Russell Brady is being charged so much since the number of hours billed is comparable to other clients who do not get charged as much. Dinesh tells her that he will work on it immediately and promises an answer by the next day, Friday morning. Early morning on Friday, November 17, Tom O'Brian had a great conversation with Colin Bennet who called to renew his contract with O'Brian & McKinney. Collin has been going through a difficult situation since he has chosen not to stand for the National Anthem ceremony that occurs before each game. Collin position is to draw public attention to recent incidents of police brutality against African Americans, and his stance has created a lot of controversy. Colin is very happy with OM's representation which has been very effective at managing all the press that his actions have generated. Danielle Chen, is the Account Executive managing Collin's account and Tom wants to promote Danielle and give her a performance bonus. Soon after, at 11:30am, Tom learns through his assistant that Russell Brady has been talking to other PR firms. Tom is concerned, since he hasn't heard anything from Kate. Tom calls Kate and demands an explanation. Kate explains that she is expecting a report from the Accounting Department and that she will discuss at the partners' meeting later that day at 2:00pm. Tom demands that Kate fire John immediately and that the account be transferred to him so that Danielle Chen can take over, since Danielle had been successfully managing Colin's Bennet account. Kate responds that she would like to wait until she gets all the information before she fires anybody. Tom reluctantly agrees. Dinesh worked through the night. He found that his boss (the Controller: Mr. Loveless) had been using a very simple indirect costing system based on a single direct-cost category (professional labor-hours) to allocate overhead (OH). Dinesh decided to look at the indirect costs more closely applying an activity based costing (ABC) allocation system. After running the numbers, he was shocked. It was clear that the entire costing/billing system was very flawed, and that Russell Brady had been overcharged while Colin Bennet had been under-charged. Mr. Loveless found out about what Dinesh had been doing and went to Dinesh to ask him why he hadn't been notified. He looked at the report and he was furious, since he had been working at OM for more than 15 years and he was sure that the costing/billing was correct. Mr. Loveless told Dinesh to stop communicating with Kate since he wanted to take care of the matter. Soon after, Kate called and Dinesh explained that there were some problems with the costing and billing system and that this had caused the over-charging. Kate interrupted Dinesh and told him that he needed to come to the Partners meeting and report on the billing of Russell Brady and Colin Bennet to Tom as well. She explained that the issue was very important since the firm was contemplating firing John Goodfellow because they could lose Russell Brady's account who believed that he has been overcharged; while promoting Danielle Chen who had done a great job. It was 1:30pm and Dinesh was super nervous and didn't know what to do. Should he communicate his findings to anyone? And if so, what should his message be? Should he attend the meeting ignoring the instructions of his boss? He knew that Tom would not like the report and that Mr. Loveless would be furious. He also knew that John Goodfellow would lose his job and that Russell Brady would leave the firm if he didn't do something. He never thought that his job would involve so much drama and controversy. What to do? Table 1 Direct Costs for September & October, 2017 Rate Russell Brady Direct Labor(DL): Professional $130/hr. 125 hrs. Collin Bennet 125 hrs. Table 1 shows the direct costs of professional labor costs for Russell Brady and Colin Bennet. The estimated professional hours (DL) for 2017 are 12,500 hrs. Table 2 shows the total estimated indirect costs (OH) costs for OM for 2017. Indirect costs had been allocated based on DL hours. Table 2 Budgeted Indirect (OH) Costs for 2017 Total Estimated Indirect Costs Research & Admin support 990,000 8000 hrs. Technology 200,000 2000 hrs. Travel 900,000 30000 miles Travel allowance 475,000 2500 days Tech support 245,000 4000 hrs. Office Space 1,500,000 5200 ft2 Entertainment and meals 500,000 5000 meals Photocopying & materials 300,000 1200 client months Total Estimated Overhead Costs $5,110,000 Table 3 shows the actual OH costs for Russell and Colin for the months of September and October. Dinesh thought about all the people directly and indirectly affected by this costing/pricing controversy. Table 4 illustrates the employees and clients directly affected, but he recognized that the firm as well as many more individuals could be indirectly affected too. Table 3 Actual Indirect (OH) Costs for September & October, 2017 Total Russell Brady Collin Bennet Indirect Costs Research & Admin support $22,000 30 hrs. 128 hrs. Technology $6,200 25 hrs. 42 hrs. Travel $67,000 500 miles 1650 miles Travel allowance $5,750 5 days 25 days Tech support $1,600 8 hrs. 17 hrs. Office Space $12,400 23 sq. feet 20 sq. Feet Entertainment and meals $4,200 10 meals 35 meals Photocopying $2,000 $150 $1,850 Actual Total Overhead Costs $121,150 Name Tom O'Brian Kate McKinney Russell Brady John Goodfellow Mr. Loveless Dinesh Kumar Collin Bennet Danielle Chen Table 4 Characters Roles Co-founder of O'Brian & McKinney (OM) Co-founder of O'Brian & McKinney (OM) Important and unhappy client Account Executive in charge of Russell Brady's account Controller (Dinesh's Boss) New hire accountant Happy client Account Executive in charge of Collin Bennet's account Socio-economic: "Does our policy violate the right of some of our citizens to make their own choices? TRUST Individual: "Are my actions compromising the possibility that this person would trust me in the future?" Organization: If I betray someone on the team I manage, will that harm my ability to be an effective leader in the future?" Socio-economic: Does this policy make it less likely that some people will go to the police?" VIRTUE - Individual: "If I falsify the numbers on this report in order to make it look like I met my yearly goals, will lying become part of who I am?" Organization: "Does the culture of our organization make it more likely that our employees will do the right thing? - Socio-economic: "What kind of society do we want to have? say, "that's not fair" or "that hurt my feelings" they are beginning to think about how ethical values apply to real life. But doing ethics well is not always easy - and sometimes it is quite difficult. There are three things that make it difficult: - It may be difficult to identify how a particular value applies in a particular situation. - There are times when we must make trade-offs between the values. There are also times when we must consider trade-offs between multiple individuals or groups. For example, your city is considering passing a law will help one group, but the very same law will harm another group. When these difficult situations occur, there is no formula for solving them. We must use our critical thinking abilities and engage in discussions with others in order to find the best course of action. Values at Different Levels A second complication is that these values apply at different levels, since we could be considering individuals, or organizations, or entire societies. Below I have given one example of how each of the five values works at each level. EQUALITY Individual: Do my actions show that I believe that my interests are more important than this other person's interests?" Organizational: "Does everyone of similar work experience on our sales team have a fair chance at that promotion? Socio-economic: "Does our society have social structures that make success more difficult for one group than another?" HARM AVOIDANCE - Individual: Are my words offensive to this other person?" - Organizational: "When our employees complain about harassment, do we have policies that allow us to address their concerns quickly and respectfully?. Socio-economic: "Does our government use symbols that are hurtful for some of our citizens?" AUTONOMY - Individual: "Am I mistreating or deceiving this person so that I can get what I want?" - Organizational: "Are we mislabeling our product as "good for the environment" with the hope that our customers will choose to purchase it? 2. Answer the following question: (a) In addressing (i) and (ii), your task is to decide what Dinesh should do. If Dinesh decides to attend the meeting, consider the organizational impact of discussing his analysis with Kate and Tom. (i) If you were in Dinesh's position; would you attend the Partner's meeting (where you would be asked to present your report to Kate and Tom)? Please list the pros and cons of attending or not attending the meeting? (ii) Assume that Dinesh attended the meeting and explained to Kate and Tom the significance of differences between using one cost-driver versus using ABC costing to allocate OH. What course of action should OM take? Explain alternatives and conclude with your position. Try to be specific and address the consequences to all stakeholders involved (Russell, Colin, Danielle, John, Mr. Loveless, the rest of the Account Executives, Dinesh and so forth). (b) A day later, after examining Dinesh's report, Tom decides to fire John, promote Danielle, reduce the billings of Russell, and continue allocating OH using a single cost driver (professional hours). Kate calls Dinesh and tells him what is going to happen. Should Dinesh do something? Why or why not? In your discussion make reference to the value framework in Appendix A. Your response should be a page long. For part (a), please include a chart that compares both methods (one cost driver vs. ABC). Table 1: Analysis and effect of OH allocation Direct labor (prof. hrs.) Total costs Based on OH allocation using professional hrs. Russel Brady Collin Bennet OH ABC OH allocation Russel Brady Collin Bennet Please also include a table to evaluate pros and cons. Table 2: Pros & Cons of attending meeting PROS (positive) 1 3 CONS (negative) Please also include a table of the consequences of adopting ABC. Impact of allocating OH using ABC Russell Colin Danielle Mr.Loveless Dinesh 7 Other employees O'Brian & McKinney (OM) 2 For part (b), please state what should Dinesh do if OM decides to keep using the company-wide OH (single cost driver) allocation base. Should he: ask for another meeting (maybe John did not understand the report), resign, tell John, etc. Once you decide on a course of action, justify your decision using the Ethical Value Framework. Dinesh should i ne ethical consequences will be: Increase his Autonomy: How? Increase the happiness of Increase the equality of Increase the trust of