Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 42

Ethical Issues in Managing Reported Profits

A new CEO has come in from the outside to turn struggling Doak Industries into a profitable organization. Relying on market research, she wanted to focus production on the two specific product lines produced by the papers division.

?Market research proved correct, and, by the end of the year, the papers division had exceeded budgeted profits by 18 percent. The controller, Ray Green, knew that his annual bonus depended on exceeding budgeted profit and that his bonus would plateau at 10 percent above budgeted profit. Ray expected that next year’s profit plan would be similar but that next year’s budget would consider the changes in the product lines. Ray discovered that he could accrue some of next year’s expenses and defer some of this year’s revenue while still exceeding budgeted profit by 10 percent.

Required

Why would Ray Green, Doak’s controller, want to defer revenue but accrue expenses? Is this ethical?

Step 1 of 2

Cost accounting

This system is designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.