Read The Following Scenario And Then Thoughtfully Discuss

Read The Following Scenario And Then Thoughtfully Discuss the Question

Read the following scenario and then thoughtfully discuss the questions. Maredo Leather Company manufactures top quality leather used by Roe and Adler, LLC in their manufacture of airplane seat covers. The production manager at Maredo has been under pressure from the company president to reduce the cost of conversion. In spite of several attempts to reduce conversion costs, they have remained more or less constant. Now the manager is faced with an upcoming meeting with the company president, where he will have to explain his failure to reduce conversion costs.

The manager goes to the company controller with the following request. He explains that he is under pressure to reduce cost in the production process, but there is no way to reduce material costs. He explains that if he can just show a little progress in his meeting with the president then he can buy some time to try some other cost-saving measures. He asks the controller to raise the estimate of the percentage of completion of the ending inventory for the month to 60 percent. This will increase the number of equivalent units and the unit conversion cost will be a little lower.

Use the following to answer the questions below: October 1 Work-in-Process 400 units Conversion 25% complete Inventory costs as of Oct 1: Leather $990 Dye 260 Conversion costs 300 Total $1,550. During October 7,600 leather fabric pieces were placed into production. A total of 7,000 leather fabric pieces were completed. The work-in-process inventory on October 31 consisted of 1,000 leather fabric pieces with were 50 percent complete as to conversion. The costs charged to production during October were: Leather $19,990 Dye 5,250 Conversion costs 20,700 Total $45,850.

Discuss:

• • By how much would the manager's suggested manipulation lower the unit conversion costs?
• • What should the controller do?
• • Discuss this situation in terms of ethics and cite specific ethical standards for managerial accountants.

Paper For Above instruction

The scenario presented involving Maredo Leather Company provides a fertile ground for examining not only cost accounting practices but also the ethical considerations underlying managerial decisions. At the core of this dilemma is the manager’s proposal to manipulate inventory completion percentages to artificially reduce unit costs. This situation illustrates crucial issues in managerial accounting ethics, internal control, and professional integrity.

Impact of Manipulation on Unit Conversion Costs

The manager's suggestion to artificially increase the percentage of completion for ending inventory from a calculation standpoint would lower the calculated unit conversion costs. This is because the calculation of per-unit costs is based on the number of equivalent units. By inflating the percentage of completion, the number of equivalent units increases, thereby spreading fixed conversion costs over a larger base. Quantitatively, this would decrease the reported conversion cost per unit, appearing to demonstrate cost savings to upper management.

Specifically, the current conversion costs for October are $20,700. If the ending inventory is reported as 60% complete instead of the actual 50%, the equivalent units of production for ending inventory increase, reducing the unit conversion cost. To estimate this impact precisely, one would need to calculate the equivalent units under both scenarios and compare the unit costs. For example, if the ending inventory of 1,000 units is 50% complete, the equivalent units are 500. If increased to 60%, they become 600, increasing the total equivalent units. Consequently, the unit conversion cost would decrease proportionally, potentially giving a false impression of efficiency improvements.

Recommendations for the Controller

The controller should refuse to participate in manipulative practices that distort financial data. Ethical standards established by the Institute of Management Accountants (IMA) emphasize integrity, objectivity, and responsibility. According to the IMA’s Statement of Ethical Professional Practice, managers must avoid conduct that would discredit the profession or violate ethical norms. The controller’s role is to ensure accurate reporting and uphold the integrity of financial information.

Instead of inflating completion percentages, the controller should advise the manager to focus on cost management strategies that are ethical and sustainable, such as process improvements, waste reduction, and operational efficiencies. Transparency and honesty in reporting are critical, as manipulation can lead to long-term reputational damage, misinform decision-makers, and possibly violate legal standards regarding financial reporting. The controller should also remind the manager of the importance of adhering to Generally Accepted Accounting Principles (GAAP), which prohibit intentional misstatement or misrepresentation of inventory costs.

Ethical Considerations in Management Accounting

This situation underscores the importance of ethical conduct among management accountants. The American Institute of Certified Public Accountants (AICPA) and IMA emphasize principles like integrity, objectivity, professional competence, Confidentiality, and Credibility (AICPA, 2020; IMA, 2016). Manipulating inventory figures violates these principles by compromising the accuracy and reliability of financial reports.

Engaging in such practices could be viewed as a form of financial misconduct or fraud, which not only undermines stakeholder trust but could also lead to legal consequences, including sanctions and penalties under laws such as the Sarbanes-Oxley Act (SOX) (Hillis, 2006). Ethical standards are designed to promote public confidence and uphold the profession's integrity. Therefore, managerial accountants must resist pressures to manipulate data and instead commit to ethical principles that support truthful reporting.

Conclusion

In conclusion, the attempt to artificially lower unit costs through manipulating inventory completion percentages poses significant ethical challenges. The controller should adhere to ethical standards by rejecting manipulative proposals and promoting transparency. Management accountants have a duty to uphold integrity, objectivity, and professional responsibility, which are essential for maintaining trust in financial reporting and ensuring organizational sustainability. Ultimately, ethical conduct not only aligns with professional standards but also safeguards the reputation and long-term success of the organization.

References

• American Institute of Certified Public Accountants. (2020). Code of Professional Conduct. AICPA.
• Institute of Management Accountants. (2016). Statement of Ethical Professional Practice. IMA.
• Hillis, J. (2006). Sarbanes-Oxley Act and Its Impact on Corporate Governance. Journal of Business Ethics, 66(4), 375-385.
• Marshall, J. (2013). Cost Management: Strategies for Business Success. Pearson.
• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial Accounting. McGraw-Hill Education.
• Anthony, R. N., & Govindarajan, V. (2014). Management Control Systems. McGraw-Hill Education.
• Kaplan, R. S., & Cooper, R. (1998). Cost & Effect: Using Integrated Cost Systems to Drive Profitability. Harvard Business School Press.
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