ATC 12-5 Ethical Dilemma: Amount Of Equivalent Units

Atc 12-5 Ethical Dilemma Amount Of Equivalent Unitsrené Alverez Knew S

Determine the equivalent cost per unit under two different assumptions about the percentage of completion of ending inventory: first assuming 40 percent complete, then assuming 60 percent complete. Comment on Mr. Sawyer's motives for setting the percentage at 60 percent instead of 40 percent. Discuss whether Ms. Alverez's actions, including her decision to sign off on the estimate and her potential disclosure to the chief accountant, violate ethical standards or confidentiality principles. Analyze the ethical considerations involved, including the components of the fraud triangle, which may have influenced Ms. Alverez's behavior.

Sample Paper For Above instruction

The ethical dilemma faced by Ms. René Alverez at Standard Tool Company highlights the complexities involved in managerial accounting decisions, ethical standards, and personal integrity. As the cost accounting specialist in the finishing department, Ms. Alverez found herself caught between her professional judgment and the strategic interests of her superior, Mr. Bill Sawyer, who was on a trajectory towards promotion. This situation underscores the importance of ethical conduct in accounting roles and the potential implications of manipulative estimates on financial reporting and managerial decision-making.

Analysis of Equivalent Cost per Unit at Different Percentages of Completion

The primary task involves calculating the equivalent cost per unit under two scenarios: 40% and 60% completion of the ending inventory. The total costs for the period, including beginning inventory and additional costs incurred, amount to $902,400. The total units available for production were 105,500 units (beginning inventory of 5,500 plus 94,000 units started), with 90,000 units transferred out. The ending inventory thus comprises 15,500 units (105,500 - 90,000).

Case 1: 40% Completion of Ending Inventory

To determine the equivalent units, the ending inventory units are multiplied by the percentage of completion:

  • Equivalent units in ending inventory = 15,500 × 40% = 6,200 units.
  • Total equivalent units for cost calculation = Units transferred out (90,000) + Equivalent units of ending inventory (6,200) = 96,200 units.

Next, the cost per unit is calculated by dividing total costs by total equivalent units:

Cost per unit = $902,400 / 96,200 ≈ $9.37.

Case 2: 60% Completion of Ending Inventory

  • Equivalent units in ending inventory = 15,500 × 60% = 9,300 units.
  • Total equivalent units = 90,000 + 9,300 = 99,300 units.

Using this, the cost per unit becomes:

Cost per unit = $902,400 / 99,300 ≈ $9.08.

Implications of Mr. Sawyer's Estimated 60% Completion

Mr. Sawyer's estimation of 60% completion instead of 40% effectively spreads the total cost over fewer equivalent units, resulting in a higher per-unit cost. This inflated percentage artificially reduces the reported cost per unit, which may enhance the appearance of cost control and efficiency. Such an estimate could be motivated by a desire to demonstrate improved performance metrics, impress higher management, or bolster the case for promotion and bonuses. The motive appears self-serving, aiming to present the department as more efficient than it truly is, which could mislead stakeholders about actual operational performance.

Ethical Considerations: Confidentiality and Professional Standards

Ms. Alverez, as a certified management accountant, is bound by the ethical standards outlined in her professional code, which emphasizes integrity, objectivity, confidentiality, and professional behavior. If she considers disclosing her concerns to the chief accountant regarding the manipulation of the percentage of completion, this could be viewed as a breach of confidentiality if she discloses information that was entrusted to her in her capacity as a professional. However, ethical standards also recognize the responsibility to report unethical behavior or violations of accounting principles. If the manipulation affects financial reporting or deceives stakeholders, reporting such misconduct may be justified and aligned with ethical obligations to uphold honesty and integrity.

Violations of Ethical Standards

By signing off on an estimate she believed was inaccurate without adequately supporting her position, Ms. Alverez risks violating the ethical standards related to integrity and objectivity. Failing to challenge a potentially misleading estimate might be viewed as complicity in unethical practices. Moreover, her reluctance to face potential repercussions or challenge authority reflects a compromise of her professional judgment and ethical standards. Breaching confidentiality by disclosing her concerns without proper authorization may also be problematic, depending on the organization's policies and the context of her disclosures.

The Fraud Triangle and Its Influence on Behavior

The fraud triangle—a framework comprising pressure, opportunity, and rationalization—helps explain Ms. Alverez's behavior. The pressure stems from her awareness of Mr. Sawyer's ambitions and his probable influence over her career prospects. The opportunity arises from her role and the trust placed in her to verify inventory estimates, which she ultimately feels unable to challenge. Rationalization may involve her belief that challenging Mr. Sawyer could damage her career or that the manipulation is justified to maintain departmental performance metrics. Understanding these components underscores the importance of fostering ethical organizational cultures and implementing controls to prevent such ethical breaches.

Conclusion

In conclusion, the ethical dilemmas faced by Ms. Alverez encompass issues of honesty, professional integrity, and organizational pressures. Accurate and transparent financial reporting is crucial for stakeholders' trust and decision-making. Managers must uphold ethical standards, particularly when personal career advancement conflicts with truthful reporting. Organizations should promote an environment where ethical concerns can be raised without fear of retaliation. Recognizing and addressing the elements of the fraud triangle can prevent misconduct and foster ethical behavior within financial reporting processes, ensuring accountability and integrity in managerial accounting practices.

References

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