EXERCISE 1-16 ETHICAL BEHAVIOUR Manager: If I can reduce my costs by $40000 duri
ID: 2406418 • Letter: E
Question
EXERCISE 1-16 ETHICAL BEHAVIOUR Manager: If I can reduce my costs by $40000 during this last quarter, m is 10% above the planned level, and I will receive a $10000 bonus. However, given the projections for the fourth quarter, it does not look promising. I really need that $10000. I know of one way that I can qualify. All I have to do is lay off my three most expensive salespeople. After all, most of the orders are in for the fourth quarter, and I can always hire new sales personnel at the beginning of next year. y division will show a profit that REQUIRED: What is the right choice for the manager to make? Why did the ethical dilemma arise? Is there any way to redesign the accounting reporting system to discourage the type of behaviour that the manager is contemplating?Explanation / Answer
What is the right choice for the manager to make?
The right choice for the manager to make is to analyse the reasons for reduced sales, and to control non-value add costs. He should also try to find out how the competitors of the company have been faring in the past three quarters.
Why did the ethical dilemma arise?
The ethical dilemma arose because of agency problem. The manager has placed his personal interest before the interest of his employer resulting in conflict of interest. One of the duties of an agent is to avoid conflict of interest. He does not consider what could be the long term ramifications of laying off the three most senior members of the sales team on the company.
One way to redesign the accounting system would be to adopt flexible budgeting, which would give a clear picture as to the exact cause of the poor performance, which would go a long way in responsibility accounting. It would help in pointing to the exact function which is leading to the less than expected numbers.
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