cs Case Metal Creations, Inc., is a custom manufacturer that uses a job order co
ID: 2518682 • Letter: C
Question
cs Case Metal Creations, Inc., is a custom manufacturer that uses a job order costing sys Currently, Metal Creations has 35% excess capacity in its factory. Charlie instituted a campaign to tem Rollins, the president, has al to obtain new customers. Rollins has offered the salespeople a bonus equ 25% of the gross profit on work for new customers. The average gross profit rate has been 30% of the contract price. Steve Starling, the sales manager for Metal Creations, wants to submit a proposal to a new customer that undercuts the usual pricing structure by 30%. As a result, this Job would have no gross profit using the regular job order costing system. Instead, Starling suggests that the overhead rate applied to this job should be only 40% of the normal overhead rate, resulting in a gross profit of 28% Starling suggests that the controller should handle this contract herself, and that no one else in the organization should know about it, especially the other salespeople, because the creative approach to overhead application might create problems. Required Does taking an order at a significantly reduced price create an ethical problem? acco Does altering the unting for a particular order create an ethical problem? Does asking the controller to handle the contract and keep the accounting confidential create an ethical problem? 2Explanation / Answer
1. Undertaking a contract at a significantly reduced rate does create an ethical problem in this scenario. The incentive for sales manager is 25% of the gross profits to new customers. In a bid to achieve this, Starling has reduced the pricing by 30% to acquire a new customer which would result in no gross profit for the company if the regular accounting procedure is used. Using a much lower overhead rate to conceal this decrease in price is ethically incorrect, as Starling is placing personal interest over company's interest.
2. Altering the accounting method does create an ethical problem in this scenario. The accounting method is not being altered as another accounting method is more appropriate. It is being altered to cover up the reduced price so that the gross profit margin remains unaffected and the sales person receives his incentive. This is grossly incorrect.
3. Yes, asking the controller to keep the new accounting method confidential is incorrect. As far as the president is concerned, he will only get the knowledge that Starling increased sales. However, the underrecovery of cost causing loss to the company shall not be known to him or any other employee of the company. This causes harm to the financial health of the company and is thus incorrect.
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