2. This question may generate lively debate. Where should Terri Ronsin’s
loyalties lie? Is she working for the general manager of the division or
for the corporate controller? Is there anything wrong with the “Christ-
mas bonus”? How far should Terri go in bucking her boss on a new job?
While individuals can certainly disagree about what Terri should do,
some of the facts are indisputable. First, the practice of understating di-
rect labor-hours results in artificially inflating the overhead rate. This has
the effect of inflating the cost of goods sold figures in all months prior to
December and overstating the costs of inventories. In December, the
huge adjustment for overapplied overhead provides a big boost to net
operating income. Therefore, the practice results in distortions in the
pattern of net operating income over the year. In addition, since all of
the adjustment is taken to Cost of Goods Sold, inventories are still over-
stated at year-end. This means, of course, that the net operating in-
come for the entire year is also overstated.
While Terri is in an extremely difficult position, her responsibilities under
the IMA’s Standards of Ethical Conduct for Management Accountants
seem to be clear. The Objectivity Standard states that “management ac-
countants have a responsibility to disclose fully all relevant information
that could reasonably be expected to influence an intended user’s un-
derstanding of the reports, comments, and recommendations pre-
sented.” In our opinion, Terri should discuss this situation with her im-
mediate supervisor in the controller’s office at corporate headquarters.
This step may bring her into direct conflict with the general manager of
the division, so it would be a very difficult decision for her to make.
© The McGraw-Hill Companies, Inc., 2006. All rights reserved.
Solutions Manual, Chapter 3 139
Case 3-35 (continued)
In the actual situation that this case is based on, the corporate control-
ler’s staff were aware of the general manager’s accounting tricks, but
top management of the company supported the general manager be-
cause “he comes through with the results” and could be relied on to hit
the annual profit targets for his division. Personally, we would be very
uncomfortable supporting a manager who will resort to deliberate dis-
tortions to achieve “results.” If the manager will pull tricks in this area,
what else might he be doing that is questionable or even perhaps ille-
gal?
Group Exercise 3-36
Student answers will depend on who they contact. For illustration pur-
poses, we contacted the chief financial officer of Avianne Healthcare Prod-
ucts, a manufacturer of scented soaps and lotions, who provided us with
the following information.
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