EXERCISE 3-17 (30 MINUTES)

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.