Ethics In Business
Consumers and attorney generals in more than 40 states accused a prominent nationwide chain of auto repair shops of misleading customers and selling them unnecessary parts and services, from brake jobs to front-end alignments. Lynn Sharpe Paine reported the situation as follows in Managing for Organizational Integrity” Harvard Business Review Volume 72 Issue 3:
In the face of declining revenues, shrinking market share, and an increasingly competitive market. . . management attempted to spur performance of its auto Centers.. . . The automotive service advisers were given product-specific sales quotas—sell so many springs shock absorbers, alignments, or brake jobs per shift—and paid a commission based on sales. . .
[F]ailure to meet quotas could lead to a transfer or a reduction in work hours. Some employees spoke of the “pressure. Pressure, pressure” to bring in sales.
This pressure-cooker atmosphere created conditions under which employees felt that the only way to satisfy top management was by selling products and services to customers that they didn’t really need.
Suppose all automotive repair businesses routinely followed the practice of attempting to sell customers unnecessary parts and services.
Required:
- How would this behavior affect customers? How might customers attempt to protect themselves against this behavior?
- How would this behavior probably affect profits and employment in the automotive service industry?
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Loose Leaf For Managerial Accounting for Managers
- Consider the following conversation between Leonard Bryner, president and manager of a firm engaged in job manufacturing, and Chuck Davis, certified management accountant, the firms controller. Leonard: Chuck, as you know, our firm has been losing market share over the past 3 years. We have been losing more and more bids, and I dont understand why. At first, I thought that other firms were undercutting simply to gain business, but after examining some of the public financial reports, I believe that they are making a reasonable rate of return. I am beginning to believe that our costs and costing methods are at fault. Chuck: I cant agree with that. We have good control over our costs. Like most firms in our industry, we use a normal job-costing system. I really dont see any significant waste in the plant. Leonard: After talking with some other managers at a recent industrial convention, Im not so sure that waste by itself is the issue. They talked about activity-based management, activity-based costing, and continuous improvement. They mentioned the use of something called activity drivers to assign overhead. They claimed that these new procedures can help to produce more efficiency in manufacturing, better control of overhead, and more accurate product costing. A big deal was made of eliminating activities that added no value. Maybe our bids are too high because these other firms have found ways to decrease their overhead costs and to increase the accuracy of their product costing. Chuck: I doubt it. For one thing, I dont see how we can increase product-costing accuracy. So many of our costs are indirect costs. Furthermore, everyone uses some measure of production activity to assign overhead costs. I imagine that what they are calling activity drivers is just some new buzzword for measures of production volume. Fads in costing come and go. I wouldnt worry about it. Ill bet that our problems with decreasing sales are temporary. You might recall that we experienced a similar problem about 12 years agoit was 2 years before it straightened out. Required: 1. Do you agree or disagree with Chuck Davis and the advice that he gave Leonard Bryner? Explain. 2. Was there anything wrong or unethical in the behavior that Chuck Davis displayed? Explain your reasoning. 3. Do you think that Chuck was well informedthat he was aware of the accounting implications of ABC and that he knew what was meant by cost drivers? Should he have been well informed? Review (in Chapter 1) the first category of the Statement of Ethical Professional Practice for management accountants. Do any of these standards apply in Chucks case?arrow_forwardIntroduction: Accounting is the backbone of any business, ensuring financial transparency and stability. However, in the fast-paced environment of urban domestic businesses, accounting errors can occur, potentially leading to financial mismanagement and operational challenges. This case study explores a scenario where accounting errors in an urban domestic business have significant implications for the company's financial health. Scenario: Consider a small urban domestic business that specializes in providing artisanal home decor. The business, driven by increasing demand, recently expanded its operations, opening a second store in a different part of the city. As the business grows, so does the complexity of its financial transactions. Accounting Errors: Several errors have been identified in the business's accounting records, including: Double Counting Inventory: The business failed to update its inventory management system, resulting in double counting of certain items. This led to…arrow_forwardIdentify the major problems in this situation and explain how they impact the organization. You will need to consider both behavioral and analytical factors. Specifically, how might managerial accounting concepts, tools, or techniques be applied to help resolve this dilemma? What are possible consequences of applying the same to this dilemma? Briefly explain Orange Electronics has been experiencing declining profit margins and has been looking for ways to increase operating income. It cannot raise selling prices for fear of losing business to its competitors. It must either cut costs or improve productivity. The company uses a standard cost system to evaluate the performance of the soldering department. It investigates all unfavorable variances at the end of the month. The soldering department rarely completes the operations in less time than the standard allows (which would result in a favorable variance). In most months, the variance is zero or slightly unfavorable. Reasoning that…arrow_forward
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- Consider the following conversation between Gary Means, manager of a division that produces industrial machinery, and his controller, Donna Simpson, a certified management accountant and certified public accountant: Gary: Donna, we have a real problem. Our operating cash is too low, and we are in desperate need of a loan. As you know, our financial position is marginal, and we need to show as much income as possibleand our assets need bolstering as well. Donna: I understand the problem, but I dont see what can be done at this point. This is the last week of the fiscal year, and it looks like well report income just slightly above breakeven. Gary: I know all this. What we need is some creative accounting. I have an idea that might help us, and I wanted to see if you would go along with it. We have 200 partially finished machines in process, about 20% complete. That compares with the 1,000 units that we completed and sold during the year. When you computed the per-unit cost, you used 1,040 equivalent units, giving us a manufacturing cost of 1,500 per unit. That per-unit cost gives us cost of goods sold equal to 1.5 million and ending work in process worth 60,000. The presence of the work in process gives us a chance to improve our financial position. If we report the units in work in process as 80% complete, this will increase our equivalent units to 1,160. This, in turn, will decrease our unit cost to about 1,345 and cost of goods sold to 1.345 million. The value of our work in process will increase to 215,200. With those financial stats, the loan would be a cinch. Donna: Gary, I dont know. What youre suggesting is risky. It wouldnt take much auditing skill to catch this one. Gary: You dont have to worry about that. The auditors wont be here for at least 6 to 8 more weeks. By that time, we can have those partially completed units completed and sold. I can bury the labor cost by having some of our more loyal workers work overtime for some bonuses. The overtime will never be reported. And, as you know, bonuses come out of the corporate budget and are assigned to overheadnext years overhead. Donna, this will work. If we look good and get the loan to boot, corporate headquarters will treat us well. If we dont do this, we could lose our jobs. Required: 1. Should Donna agree to Garys proposal? Why or why not? To assist in deciding, review the corporate code of ethics standards described in Chapter 1. Do any apply? 2. Assume that Donna refuses to cooperate and that Gary accepts this decision and drops the matter. Does Donna have any obligation to report the divisional managers behavior to a superior? Explain. 3. Assume that Donna refuses to cooperate; however, Gary insists that the changes be made. Now what should she do? What would you do? 4. Suppose that Donna is 63 and that the prospects for employment elsewhere are bleak. Assume again that Gary insists that the changes be made. Donna also knows that his supervisor, the owner of the company, is his father-in-law. Under these circumstances, would your recommendations for Donna differ?arrow_forwardYour HR Manager approaches you regarding a worker whose performance reports have been deteriorating lately and seeks your opinion on whether to keep or fire the worker. To balance things out, the manager says that the business has invested a lot of time and money in educating this employee on company-specific procedures, and that it would be a shame to let that money go to waste. What response would you have?arrow_forward(1) What are some key differences between financial and managerial accounting? (b) Is it permissible to violate generally accepted accounting principles (GAAP) when preparing reports used strictly by company management? If so, why? (c) Please discuss two of the five basic phases of the “management process” discussed in Chapter 18. (d) The top management of a fast-food hamburger chain is considering installing point-of-sale machines that will allow customers to pay for food with a debit or credit card. Previously, the restaurant has accepted only cash. What information could the management accounting department supply to assist management with this decision?arrow_forward
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