Question 4 (13 marks)

Forber Inc., a manufacturer of breakfast cereals and snack bars, has experienced several years of steady growth in sales, profits, and dividends while maintaining a relatively low level of debt. The board of directors has adopted a long-run strategy to maximize the value of the shareholders investment. In order to achieve this goal, the board of directors established the following five-year financial objectives.

Increase sales by 13 percent per year.

Increase income before taxes by 15 percent per year.

Maintain long-term debt at a maximum of 16 percent of assets.

These financial objectives have been attained for the past three years. At the beginning of last year, the president of Forber Inc., Andrea Donis, added a fourth financial objective of maintaining cost of goods sold at a maximum of 70 percent of sales. This goal also was attained last year.

The budgeting process at Forber Inc. is to be directed toward attaining these goals for the forthcoming year, a difficult task with the economy in a prolonged recession. In addition, the increased emphasis on eating helpful foods has driven up the price of ingredients used by the company significantly faster than the expected rate of inflation. John Winslow, cost accountant at Forber Inc., has responsibility for preparation of profit plan for next year. Winslow assured Donis that he could present a budget that achieved all of the financial objectives. Winslow believed that he could overestimate the ending inventory and reclassify fruit and grain inspection costs as administrative rather than manufacturing costs to attain the desired objective. The actual statements for 2018 and the budgeted statements for 2019 that Winslow prepared are as follows:

Forber Inc

Income Statement

2018

Actual 2019

Budgeted

Sales $850,000 $947,750

Less: Variable costs:

Cost of goods sold 510,000 574,725

Selling and administrative 90,000 87,500

Contribution margin $250,000 $285,525

Less: Fixed costs:

Manufacturing 85,000 94,775

Selling and administrative 60,000 70,000

Income before taxes $105,000 $120,750

Forber Inc

Balance Sheet

2018

Actual 2019

Budgeted

Assets:

Cash $10,000 $17,000

Accounts receivable 60,000 68,000

Inventory 300,000 365,000

Plant and equipment

(net of accumulated depreciation)

1,630,000

1,600,000

Total $2,000,000 $2,050,000

Liabilities:

Accounts payable $110,000 $122,000

Long-term debt 320,000 308,000

Stockholders equity:

Common stock 400,000 400,000

Retained earnings 1,170,000 1,220,000

Total $2,000,000 $2,050,000

The company paid dividends of $27,720 in 2018, and the expected tax rate for 2019 is 34 percent.

Required:

(1)For each of the financial objectives established by the board of directors and the president of Forber Inc., determine whether John Winslows budget attains these objectives. Support your conclusion in each case by presenting appropriate calculations and use the following format for your answer. (8 marks)

Objective Attained/Not attained Calculations

(2)Explain why the adjustments contemplated by John Winslow are unethical, citing specific standards of ethical conduct for management accountants. (5 marks)