siuon 1-28 Pharmaceutical company, budgeting. ethics. Eric Johnson was recently Research and Development (R&D) for PharmaCor, a Fortune 500 pharmaceutical promoted to Controller company, which manufactures prescription drugs and nutritional supplements. The company's total R&D cost for 2012 was expected (budgeted) to be $5 billion. During the company's mid-year budget review, Eric realized current R&D expenditures were already at $3.5 billion, nearly that 40% above the mid-year target. At this current rate of expenditure, the R&D division was on track to exceed its total year-end budget by $2 billion In a meeting with CFO, James Clark, later that day, Johnson delivered the bad news. Clark was both shocked and outraged that the R&D spending had gotten out of control. Clark wasn't any more understand ing when Johnson revealed that the excess cost was entirely related to research and development of a new drug, Lyricon, which was expected to go to market next year. The new drug would result in large profits for Clark had already announced his expectations of third quarter earnings to Wall Street analysts. I the R&D expenditures weren't reduced by the end of the third quarter, Clark was certain that the targets he had announced publicly would be missed and the company's stock price would tumble. Clark instructed Johnson to make up the budget short-fall by the end of the third quarter using "whatever means necessary. PharmaCor, if the product could be approved by year-end. HAPTER 1 THE MANAGER AND MANAGEMENT ACCOUNTING Johnson was new to the Controller's position and wanted to make sure that Clark's orders were fol- lowed. Johnson came up with the following ideas for making the third quarter budgeted targets: a. Stop all research and development efforts on the drug Lyricon until after year-end. This change would b. Sell off rights to the drug, Markapro. The company had not planned on doing this because, under cur of the company's R&D expenditures reducing R&D expense on the income statement delay the drug going to market by at least six months. It is also possible that in the meantime a PharmaCor competitor could make it to market with a similar drug rent market conditions, it would get less than fair value. It would, however, result in a onetime gain that could offset the budget short-fall. Of course, all future profits from Markapro would be lost c. Capitalize some of the company's R&D expenditure This transaction would not be in accordance with GAAP, but Johnson thought it was justifiable, since the Lyricon drug was going to market early next year. Johnson would argue that capitalizing R &D costs this year and expensing them next year would better match revenues and expenses. Required1. Referring to the "Standards of Ethical Behavior for Practitioners of Management Accounting a Required Financial Management," Exhibit 1-7 on page 38, which of the preceding items (a-c) are acceptable to use? Which are unacceptable? 2. What would you recommend Johnson do
