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Ethics in accounting

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Introduction

Terri Ronsin has just transferred to a new position as divisional controller. One of her first tasks as divisional controller is to develop the division's predetermined overhead rate for the upcoming year. The predetermined overhead rate is computed by dividing the estimated total manufacturing overhead cost by the estimated total direct-labor hours. The production manager estimates that she will need about 440,000 direct-labor hours to meet the sales projections for the year. Teri develops the predetermined overhead rate and goes to her manager for approval. ...read more.

Middle

In this situation the overapplied overhead would be closed out to Cost of Goods Sold. This would be done by debiting Cost of Goods Sold and crediting Manufacturing Overhead resulting in a decrease in Cost of Goods Sold. At the end of the year, Cost of Goods Sold and operating expenses are subtracted from sales. The result of this is the net operating income. Therefore, if the Cost of Goods Sold is lower, then the net operating income will be higher. ...read more.

Conclusion

Therefore Teri Ronsin should not go along with the general manager's plan to manipulate the predetermined overhead rate. The Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management specifies what should be done if an employee suspects unethical conduct. The code says that the employee should discuss the problem with an immediate supervisor, unless they are involved. Since in this case Teri's manager is involved, she should go to the next higher management level. She should also consult her attorney to be sure of any legal obligations and rights concerning the ethical dilemma. ...read more.

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