ACC 206 Week 5- Ethical Issue 22-1
ACC 206 Week 5- Ethical Issue 22-1 fin571
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Date Created: 11/11/15
Week 5 DQ39s ACC206 Principles of Accounting Tutorial Ashford University Required Readings 1 Chapter 22 The Master Budget and Responsibility Accounting 2 Chapter 23 Flexible Budgets and Standard Costs Discussions The Master Budget and Responsibility Accounting From Chapter 22 Ethical Issue 221 Ethical Issue 221 20 min This case centers on the ethics of padding the budget and whether the motivation for this action personal gain or operational efficiency makes a difference 1 What is the ethical issue The new bookkeeper s query about the 15 increase in the budget requires the assistant managercontroller to consider the ethics of padding the budget The hotel manager expects the assistant managercontroller to inflate parts of the master budget There are several ethical considerations involved in this issue Controller s integrity and vs Controller s selfinterest professional and job protection responsibility Controller s loyalty and vs Controller s loyalty to responsibility to manager company Hotel s operational vs Fairness to company s effectiveness other hotels CLR comment on the above the way the original exercise is written there is no reason to think that Dunn has any doubts or second thoughts about the budget issue with the possible exception of the ambiguous word initially So the statement above T he new bookkeeper s query requires the managercontroller to consider the ethics of padding the budget does not follow from the facts of the case as presented 2 What are my options Dunn s alternatives include a Continue budgeting as in the past ie adding additional funds to the labor and supplies budget b Discuss the matter with Murry to clarify his policy and discover whether company headquarters condones the policy Dunn should also try to gauge Murry s motivations for increasing the budgeted amounts c If Murry provides an unsatisfactory response Dunn could contact company headquarters 3 What are the possible consequences Continue budgeting as before This avoids a possible confrontation with Murry and the hotel will continue to operate as before However Dunn s integrity is compromised Dunn may rationalize this alternative if she decides to observe how Murry uses the budgetary slack over the next year In effect Dunn is waiting to gather more information However if headquarters managers uncover the intentionally inflated budget they may reject this year s budget Discuss matter with Murry Murry has already explained his position He may not want to discuss it again which could strain their working relationship However this would seem less likely if Murry really believes his actions are in the best interests of his hotel and the company rather than to protect his own bonus The discussion should help clarify Dunn s ethical dilemma If Murry believes he is acting in the best interests of the hotel and company then Dunn can consider other ways of operating the hotel effectively without padding the budget Murry might welcome such suggestions which would enhance Dunn s reputation Contact company headquarters Going over the manager s head directly to company headquarters would damage the relationship between Murry and Dunn Murry may even fire Dunn Dunn does not have enough information to take this step If the company officially or unofficially accepts this level of slack then approaching headquarters could damage Dunn s reputation especially since the company has approved the master budget in the past At the most Dunn could ask headquarters for information on the company s budgeting policies 4 What should I do Given the uncertainty over Murry s motivation and the company s position students decisions will depend on the information upon which they focus Clearly the assistant managercontroller should not simply ignore the issue but she is not in a position to complain to company headquarters about the manager A combination of the first and second alternatives would be a reasonable course of action Flexible Budgets and Standard Costs What are the bene ts of standard costs and how do businesses set those standards When compared to other costing methods there are several decided advantages associated With standard costing We ll take a look at four major ones The Chartered Institute of Management Accountants CIMA de nes standard cost as the predetermined cost based on technical estimates for materials labor and overhead for a selected period for a prescribed set of working conditions Standard costing predetermines all costs compares them with actual costs and analyzes the reasons for variance The management then either takes steps to eliminate the variance or revise standard costs based on new realities The standard costing methodology offers many advantages and many companies prefer this costing method over others methods such as process costing or historical costing Here we look at 4 advantages of standard costing One of the direct advantages of standard costing lies in cost control Comparing standard costs With actual costs pinpoint areas Where costs have gone out of control allowing management to take remedial actions The variance provides management with a fixed quantifiable target when undertaking such remedial actions The emphasis on variations from standard costs promotes cost consciousness and a culture of thrift and efficiencyorientation across the board helping organizations control costs Standard costing also provides management with a measure of the latest developments such as rising prices allowing revision of selling prices or making process adjustments 2 Ef ciency Standard costing indirectly contributes to process efficiency Fixing standard costs requires a detailed study of different aspects of the business and its processes For instance determining manufacturing expenses requires a time and motion study and determining standard inventory costs mandates of study of material control processes Very often such studies bring to light various inefficiencies and defects providing managers with a ready opportunity to correct such mistakes and promote efficiency The standard costing methodology of comparing actual costs with standard costs enables a reliable evaluation of the performance of various cost centers The alternative method of determining performance by comparing costs in different periods is inherently faulty as it does not consider the varying circumstances during both periods 3 Price Fixing A major advantage of standard costing is that it helps determine prices and formulates production policies in advance It also allows making estimates during product planning or the pre manufacturing phase Standard costing simplifies valuation of stock by transferring the difference between standard costs and actual costs to a separate variance account 4 Management Standard costing promotes management by exception where management provides a fixed target and does not interfere as long as the targets are adhered to or achieved management intervention comes only in cases of deviations Standard costing management by exception frees the management from routine chores and places the focus on core issues Standard costing identifies the cost of individual processes or products thereby making possible an informed and scientific approach toward budget planning or profit maximization through various product mixes Standard costing provides ready made targets that make goal setting and institution of an incentive system easy Finally standard costing benefits extends to the concerns of profitability and efficiency in a rankandfile activity rather than exclusive management functions Standard costing places responsibility for identifying variance With line managers and thereby integrates product or process efficiency interventions as a routine line activity rather than make it a specialized staff management intervention Standard costing is a valuable tool the benefits of Which extends to much more than better accounting Companies can reap the advantages of standard costing depending on how correctly they approach it and how well they use it
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