A Division of the Company uses absorption costing for profit reporting. The general manager of the Division is concerned about meeting the income objectives of the division. At the beginning of the reporting period, the division had an adequate supply of inventory. The general manager has decided to increase production of goods in the plant in order to allocate fixed manufacturing cost over a greater number of units.
Unfortunately, the increased production cannot be sold and will increase the inventory. However, the impact on earnings will be positive because the lower cost per unit will be matched against sales. The general manager has come to you, the controller, to determine exactly how much additional production is required in order to increase net income enough to meet the division’s profit objectives.
You analyze the data and determine that the inventory will need to be increased by 40% in order to absorb enough fixed costs and meet the income objective; however, you also determine the increased inventory cannot be sold given existing demand. Prepare your report regarding your decision to the division manager.
Requirements: Apply the Guidelines for Ethical Conduct from Chapter 1(Text book: Financial and Managerial Accounting, 13 Edition) to discuss whether General Manager is acting in an ethical manner. The following questions should help you identify and sort out the questions to be considered
- Identify the consequences and its effects on others including answers to the following questions in this sequence:
a. What parties (stakeholders) may be harmed or benefited?
b. Whose rights or claims may be violated?
c. Which specific interests are in conflict?
- Consider your obligations and responsibilities to the various stakeholders. What is the effect of each alternative on the various stakeholders? Which stakeholders are harmed or benefited most?
- Make a decision that is fair and ethical to those affected.
It may help to research the internet for articles regarding various thoughts on ethics. Be sure to provide material references for material included in your report.