Please read the following scenario (attachment) and discuss the questions below:

Scenario:

Its reporting year ends December 31. The Chief Financial Officer (CFO) is concerned with having enough cash to pay the expected income tax bill because of poor cash flow management. On November 15, the purchasing department buys raw materials in anticipation of rapid growth in CD-ROM orders after the beginning of the year. The CFO tells Kathleen that he is going to record the purchase as Supplies Expense.

Please help Kathleen to address her concerns:

• What motivation would the CFO have for demanding that the raw materials be recorded as Supplies Expense?
• What ethical implications are there?

Cite at least one source to support your answers. Use APA to cite your source(s).

Unit 1 Discussion Lecture Differentiating Between Product and Period Costs Transcript Mannie: Hi Jennifer. Are you ok? Is something wrong? Jennifer: Hi Mannie. I am working on my MBA, and currently taking Managerial Accounting. Last night, I received a challenging homework assignment and I just spent half of my lunch hour working on it. I am struggling with it because I don't understanding the difference between product and period costs. Mannie: I have a few minutes before my next meeting. I can help you with that. Get yourself some coffee and come down to my office. Jennifer: Thanks! I'll be there in just a minute. Jennifer: Hello Mannie: Come in and have a seat. Now let me see if I can explain those concepts. Jennifer: I appreciate your help. Can you also explain how inventory and the cost of goods sold account relate to product costs? Mannie: Product costs are incurred in the process of preparing a product for sale. This includes the cost of purchasing the product, insuring it, freight-in, repackaging it for resale. Mannie: In our manufacturing plant, raw materials and labor are required for product assembly. The costs of running a factory or an assembly line that can be traced to a product are also product costs. Many people refer to these indirect product costs as \"Overhead\". In both retail and manufacturing, these inventory items are held with the purpose of selling them to customers. The costs of these items are not expensed on the Income Statement until they are actually sold. Instead, they are part of the inventory account and are stored on the Balance Sheet. Jennifer: Oh! I understand what you're saying. Mannie: When an item is sold, its cost is transferred from the Inventory account and to the Cost of Goods Sold account. This follows the basic financial accounting principle of matching revenue and expenses to each other in the same reporting period. Jennifer: I see. Mannie: Period costs are costs that are incurred over a period of time and are not identified with a specific product. For example, the receptionist's salary, and the electricity for the sales office. Mannie: These costs are expensed on the Income Statement under the Operating Expenses section, in the period in which they were incurred. Jennifer: Why does it matter whether a cost is a product cost or a period cost if both costs are used in determining Net Income? Mannie: It matters because inventory is not always sold in the same period in which it was purchased or manufactured. Financial Statements that are prepared for external users will match the cost of the inventory that was sold to the revenue that it generated using the Absorption Costing Method. This method allows you to treat inventoriable costs as product costs. They become part of the cost of goods sold. Period costs, on the other hand, are expensed as they are incurred under the operating expenses section of the Income Statement. Jennifer: Oh! That makes so much sense. Mannie: Fixed Manufacturing Overhead, a product cost under the Absorption costing method, usually includes costs such as Factory Supervisor salaries, and depreciation on machinery and equipment. As a manager, you will need to carefully consider fixed manufacturing overhead as a component of this method. While these costs cannot be directly traced to a particular product, they are proportionately allocated to each product. I'll show you a general formula for computing this cost allocation on my computer. Mannie: The general formula for computing this is to divide the total expected fixed manufacturing overhead costs by the total number of units produced. (new slide) Mannie: (new slide) You see fixed manufacturing overhead costs are spread out over all of the units produced, not just the ones that are sold. Mannie: I'll show you an example on my whiteboard. Jennifer: Ok great. This will help me to visualize what you are explaining. Mannie: The allocated per unit cost is lower than it should be because the denominator (Total number of units produced) is often bigger than the number of units actually sold. Let's say the total estimated overhead equals $1000 dollars, and there are 100 units produced and 80 units sold. The allocated fixed manufacturing overhead which is $1000 dollars is divided by 100 (the number of units produced) is equal to $10 dollars per unit. This means that on the income statement, the units that are sold were allocated as $10 each in fixed overhead costs. However, in reality only 80 units were sold. Therefore the true allocation of this cost to the units that were actually sold should have been: $ 1000 80 = $12.50 unit. This means that on the Income Statement the cost of these items is understated by $2.50 for each unit that was sold. Jennifer: I understand. In the Absorption Costing Method, the cost numbers on externally reported Financial Statements can be manipulated so that net Income is INCREASED by just producing more inventory. Mannie: Yes, and even if the inventory is not sold, the per unit allocation of FOH decreases when more units are produced. This lower number then carries over to the Income Statement, making the cost of goods sold lower and the gross profit and net income higher. Income Statements prepared using Absorption costing reflect this procedure. Jennifer: How would a manger know the true product cost? Mannie: Good question! The solution, called Variable Costing, does not conform to GAAP. But we can use it in-house for decision-making purposes. Under this method, Fixed Manufacturing overhead is treated as a period cost and is expensed every reporting period. It is not allocated to each unit. Only those costs that truly vary with the volume of production are used in computing a product's cost. Instead of determining the gross profit, you would compute the contribution margin of a product. Contribution margin is the amount of a revenue left over after paying for the \"true\" variable costs of producing the product. It is this left over amount that can be used to pay for (or contribute to) the \"fixed\" costs. Let me show you a side by side comparison of these methods. Manning: (last slide) Here is a visual comparison of how the two statements are arranged. Notice that the Absorption Costing Income Statement organizes costs as either Period or Product costs. The Variable Costing Income Statement organizes costs as either variable or fixed. Under variable costing the Fixed Manufacturing Overhead is not allocated to the products manufactured, and therefore cannot be used to manipulate Net Income. Jennifer: Thank you for spending your lunch time. This has really helped me! Bye. Mannie: You're welcome