Professional Documents
Culture Documents
FlexiblebudgetsandvarianceanalysisQ1
CandymanufacturingproducesboxesofcandythataresoldallaroundSydneystores.Thecompany
revealsthefollowingbudgetaryinformationrelatingtoitsstandarddirectmaterialanddirectlabour
costsforaboxofcandy:
Directmaterials:
$4perkg*2kgperbox=$8perbox
Directlabour:
$20perhour*15minutesperbox=$5perbox
ManagementisconcernedthatstaffmayhaveworkedsuboptimallyinJuly,andhaverequesteda
flexiblebudgetbeconstructedforthatperiod.Theyinformyouthat800boxeswereproducedin
themonth.300boxesfromlastmonthwereunsoldandthereforealreadyavailableforsaleatthe
startofJuly,while100boxeswerestillunsoldattheendofJuly.Julystotalsalesrevenuewas
$50,000.Managementhadexpectedtoselltheboxesfor$52each.InJuly,directlabourstaffhad
actuallyworked230hoursandwerepaid$4,140.Also,2700kilogramsofdirectmaterialswere
purchasedinJuly,for$10,000.Thedirectmaterialsbalanceintherawmaterialswarehousewas500
kilogramsatthestartofJuly,and800kilogramsattheendofJuly.
Required
1. PleaseconstructaflexiblebudgetforJuly,identifyingtheflexiblebudgetnumbersforsales
revenue,directmaterialsanddirectlabour.
2. PleaseidentifythedirectmaterialsanddirectlabourvariancesforJuly
Solutionpart1:
1. Flexiblebudget(July)
QtySold=BegFingoodsEndFingoods+Qtyproduced
Qtysold=300100+800=1,000units
SalesRevenue(1,000unitssold*$52)
$52,000
DirectMaterials(1,000unitssold*$8stdperbox)
($8,000)
DirectLabour(1,000unitssold*$5stdperbox)
($5,000)
Note:Asnootherexpensesweregiven,includingoverheads,wecannotcalculategrossprofitornet
profithence,wedonotcalculateaprofitfigureinthisflexiblebudget.Weonlyidentifythe
threeflexiblebudgetvalues.
Solutionpart2:
Actualqty
Purchased
Actualprice
2700kg
$3.7037perkg
=$10,000
MPV
$800F
Actualhours
X
Actualrate
230hours
$18
=$4,140
LRV
$460F
ActualqtyActualqty
Purchasedused
XX
Std.PriceStd.Price
2700kg2400kg
800units*2kgperunit
(1,600kg)
X
X
X
$4perkg$4perkg
$4perkg
=$10,800=$9,600
=$6,400
MUVorMQV(samething)
$3,200U
Actualhours
X
Std.rate
230hours
X
$20
=$4,600
800units*0.25hours
=200hours
$20
=$4,000
LEV
$600U
Flexbudgetqty
used
X
Std.Price
Flexbudgethrs
X
Std.rate
FlexiblebudgetsandvarianceanalysisQ2
Shandymanufacturingproducescartonsofbeersoldinternationally.Thecompanyrevealsthe
followingbudgetaryinformationrelatingtoitsstandarddirectmaterialanddirectlabourcostsfora
cartonofbeerin2010:
Directmaterials:
$1.50perkg*5kgpercarton=$7.50percarton
Directlabour:
$25perhour*12minutespercarton=$5percarton
Youareinformedthat4,000cartonsweresoldin2010.300cartonswerereadyforsaleatthe
beginningof2010and800finishedcartonswereinstockattheendof2010.In2010,directlabour
staffhadactuallyworked1000hoursandwerepaid$26,500.Further,25,000kilogramsofdirect
materialswerepurchasedinJuly,for$40,000.Thedirectmaterialsbalanceintherawmaterials
warehousewas2000kilogramsatthestartof2010,and6,000kilogramsattheendof2010.
Required:Pleaseidentifythedirectmaterialsanddirectlabourvariancesfor2010.
Directmaterialsused=BegDM+DMpurchasesendDM=
= 2000kg+25000kg6000kg=21000kg
Cartonsproduced=EndCartons+CartonssoldBegcartons
=800cartons+4000cartons300cartons=4500cartons
Actualqty
ActualqtyActualqty
Flexbudgetqty
Purchased
Purchasedused
used
X
XX
X
Actualprice
Std.PriceStd.Price
Std.Price
25,000kg
25000kg21000kg
4500cartons*5kgperunit
(22,500kg)
X
X
X
X
$1.60perkg
$1.50perkg$1.50perkg
$1.50perkg
=$40,000
=$37,500=$31,500
=$33,750
MPV
MUVorMQV(samething)
$2,500U
$2,250F
Actualhours
Actualhours
Flexbudgethrs
X
X
Actualrate
Std.rate
Std.rate
1000hours
1000hours
4500cartons*0.2hours
=900hrs
X
X
$26.50
$25
$25
=$26,500
=$25,000
=$22,500
LRV$1,500U
LEV$2,500U
$200,000
$8 per Unit
$40,000
$3 per Unit
$20,000
Required:
(a)
(b)
Should the company accept a special order for 1,000 units at a selling price of $15 if variable
marketing expenses associated with this special order would be $2 per unit? Calculate the
incremental profits if the order is accepted.
(c)
What is the minimum selling price the company can charge for a special order for 3,000 units , if
variable marketing expenses are half their ordinary rate, and fixed manufacturing costs increase
by 30% as a result of the special order?
Solution:
a)
b)
Relevant incremental costs from special order are: $8 + $2 = $10 per unit (fixed costs do not change).
The incremental profit from the special order will be the selling price less incremental costs will therefore
be $15*1000 - $10*1000 = $5000
c)
Relevant costs: $8* 3,000 units + 0.5*$3 * 3,000 units + 0.3*$40,000 = $40,500; At the very least,
additional revenues must equal additional costs arising from this special order. Therefore, revenues must
be at a minimum, $40,500 for 3,000 units. This equates to a selling price of :$40,500/3,000 = $13.50 If the
price is any lower than $13.50, we will not be able to cover our additional costs arising from the special
order!
South
East
West
Sales
30
40
20
10
12
21
Contribution margin
18
32
(1)
12
20
(7)
(1)
(c)
Solution:
a) Tally up all the operating profits/(losses) - $9 + $20 -$7 - $1 = $21
b) If the manager eliminated the unprofitable segments, East and West divisions will lose all their revenues
and variable costs, but not their fixed costs ($6 East, and $3 West) as they are unavoidable... these will
remain as part of the profitability calculation, as they do not disappear - Therefore, total profit will now
effectively be:
$20 North + $9 South $6 East $3 West = $20
c)
To maximise corporate profits, management should drop the East Division but not the west division. This
is because the West Division is yielding a positive contribution margin, while the East Division exhibits a
negative contribution margin. Eliminating just the East Division will cause the profitability calculation to
become:
$20 North + $9 South - $6 East - $1 West = $22 This option maximises profitability,
relative to dropping both unprofitable divisions.
IntraCompanyaccountingquestion1
PottertextbookE117requirement1),page630
Solutions:
Req.1
Whenapplicationmoniesreceived:
1. BankTrust(13000sharesx$25)
Application
applicationsreceivedfor13000ordinaryshares
Whensharesareallotted:
2. Application(10000sharesx$25)
Allotment
Ordinarysharecapital(10000*$25)
Sharesallotted,offsettingexcessmoniesagainstamountsdueon
allotment.
3.Bank
Banktrust
Transfermoneytobankaccount
4.Allotment(10000sharesx$15)
Ordinarysharecapital
Amountsdueonallotment
Whenallotmentmoniesreceived:
5. Cash(10000*$7.50)
Allotment
thebalanceofallotmentmoniesreceived
(overapplicationswere3000x$25=75000/10000=$7.5pershare
allotted$15=7.50remaining)
Whencallismade:
6. Call(10000sharesx$10)
Ordinarysharecapital...
Callmoniesreceivedfor8000shares
7. Cash(8000*$10)
Call
Callmoniesreceivedon8000shares.
Torecordtheforfeiture:
100000
8.Ordinarysharecapital(2000*50)
Forfeitedsharesreserve(2000*$40)
325000
325000
325000
325000
150000
75000
250000
325000
150000
75000
75000
100000
100000
80000
80000
80000
Call(2000*$10)
20000
Torecordthereissue:
9.Cash(2000*45). 90000
Forfeitedsharesreserve(2000*$5).
10000
Ordinarysharecapital(+SE)
100000
Sharesreissuedaspaidto$50forpaymentof$45therefore;reissueisfundedpartlyfromthe
forfeitedsharesreserve.
Repurchaseofshares
10.Ordinarysharecapital(1000*$50)50000
Retainedearnings(1000*$2)
2000
Cash
52000
IntraCompanyaccountingquestion2
PottertextbookE117withthefollowingvariation:
Amountsdue:$12onApplication,$20onAllotment,callmadefor$10(remainingamount
willbecalledforsometimeinthefuture).
Excessmoniesreceivedonapplicationarerefundedtotheshareholders.The2000forfeited
sharesarereissuedfor$42pershare.Remainingfundsfromtheforfeiturearerefundedto
therespectiveshareholders.
Solutions
Whenapplicationmoniesreceived:
1. BankTrust(13000sharesx$12)
156000
Application
156000
applicationsreceivedfor13000ordinaryshares
Whensharesareallotted:
2. Application(10000sharesx$12)
120000
Ordinarysharecapital(10000*$12)
120000
Sharesallotted
120000
3.Bank
36000
Application
156000
Banktrust
Transfermoneytobankaccount,refundexcesss
200000
4.Allotment(10000sharesx$20)
200000
Ordinarysharecapital
Amountsdueonallotment
Whenallotmentmoniesreceived:
5. Cash(10000*$20)
200000
Allotment
200000
allotmentmoniesreceived
Whencallismade:
6. Call(10000sharesx$10)
100000
Ordinarysharecapital...
100000
Callmoniesreceivedfor8000shares
7. Cash(8000*$10)
80000
Call
80000
Callmoniesreceivedon8000shares.
Torecordtheforfeiture:
84000
8.Ordinarysharecapital(2000*$42)
Forfeitedsharesreserve(2000*$40)
64000
Call(2000*$10)
20000
Torecordthereissue:
9.Cash(2000*42). 84000
Ordinarysharecapital
84000
Sharesreissuedat$42partiallyreissuedforpaymentof$42nodiscounttherefore
forfeitshareaccountisnotaffected.
Forfeitedsharereserve64000
Cash
64000
Refundofforfeitedshares
Repurchaseofshares
10.Ordinarysharecapital(1000*$42)42000
Retainedearnings(1000*$10)
10000
Cash
52000
IntraCompanyAccountingquestion3
PottertextbookE1116,page633
Solutions:
Feb.25:
BankTrust(22000sharesx$32)
Application
Applicationsreceivedfor220000ordinaryshares
March5:
CashatBank(20000sharesx$32)
Application(2000*32)
BankTrust
Application
Contributedequityordinaryshares
704000
704000
640000
64000
640000
704000
640000
Sharesallotted,excessmoneyreturned
Allotment(20000*$15)
300000
ContributedequityOrdinaryshares
300000
Allotmentmoniesnowdue.
March31
CashatBank(20000*$15)
300000
Allotment
300000
allotmentmoniesreceived
April25:
Call1(20000sharesx$3)
60000
Contributedequityordinaryshares
60000
30May
CashatBank(13000*$3)
39000
Call1
39000
Callmoniesreceivedon13000shares.
30May
Contributedequityordinaryshares(7000*50)
350000
Call1
21000
Forfeitedsharesreserve(7000*47)
329000
30June
CashatBank(7000*$46)
322000
Forfeitedsharesreserve(7000*4)
28000
Contributedequityordinaryshare(7000*$50)
350000
Partlyfunded(previouslyforfeitedsharesarereissued)
30July
Forfeitedsharesreserve
301000
CashatBank
301000
Excessmoniesreturnedtooriginalholdersofshares.
InterCompanyAccountingquestion1
PotterTextbookP125,p688
Solutions:
Req.1
CASEA ThefairvaluemethodmustbeusedbyCompanyDbecauseitowns12%
(360030000)ofthetotaloutstandingcommonsharesofCompanyC.Thefairvaluemethod
mustbeusedwhenlessthan20%oftheoutstandingsharesareownedbecausetheinvestor
(CompanyD)cannotexercisesignificantinfluenceorcontrol.
CASEB TheequitymethodmustbeusedbyCompanyDbecauseitowns35%(1050030000)ofthe
outstandingcommonsharesofCompanyC.Theequitymethodmustbeusedifthelevel
ofownershipisatleast20%butnotmorethan50%becausetheinvestor(CompanyD)can
exercisesignificantinfluence,butnotcontrol,overtheoperatingandfinancingpoliciesof
CompanyC.
Req.2
CaseA12%
CaseB35%
a. January1,2012purchase:
InvestmentinSAS(+A)
90000
(3600sharesx$25)
Cash(A)
90000
Investmentinassoc.co.(+A)
262500
(10500sharesx$25)
Cash(A)
262500
b. IncomereportedbyCompanyC:
None
Investmentinassoc.company(+A)
17500
Equityinearningsofassoc.co.
(+R,+SE)
17500
($50000x35%)
c. DividendsdeclaredandpaidbyCo.C:
Cash(+A)
3060
Investmentincome(+R,+SE)
3060
*
Cash(+A)
8925
Investmentinassoc.company(A)
8925
*Computations
$25500x12%=$3060
$25500x35%=$8925
d. Netunrealisedloss/gain(SE)
10800
None
AllowancetovalueatmarketSAS
(A)
10800
3600sharesx($22market$25cost)=
$10800.
Req.3
CaseA12%
CaseB35%
StatementofFinancialPosition:
Investments:
InvestmentinSAS(1)
$79200
Investmentinassociatedcompany(2)
$271075
ShareholdersEquity:
Othercomprehensiveincome:
Netunrealisedloss/gainSAS
(10800
)
None
StatementofComprehensiveIncome:
Investmentincome
3060
None
Equityinearningsofassociatedco.
None
17500
(1) Cost$90000Allowancetovalueatmarket$10800=$79200fairvalue(reportedon
StatementofFinancialPosition)
(2) Cost$262500+%Investeesnetprofit$17500%Investeesdividendsdeclared$8925=
$271075bookvalue(reportedonStatementofFinancialPosition)
Req.4
Assets(investments),shareholdersequity(retainedearnings),andrevenues(frominvestments)are
differentbecause(1)differentmethodsofrecognisingrevenuearerequiredand(2)adjustmentsfor
changesinfairvaluearerecordedonlyunderthefairvaluemethod.Thedifferentamountsare
understandablesincetheobjectiveistorepresentthedifferentdimensionsoftherelationship
betweeninvestorandinvesteeineachcase.
InterCompanyAccountingquestion2
PotterTextbookAP123,p692
Solutions:
Req.1
Thefairvaluemethodofaccountingforlongterminvestmentsmustbeusedinthissituation
because6%oftheoutstandingvotingsharesofSixCompanyareowned.Thefairvaluemethodmust
beusedwhenlessthan20%oftheoutstandingsharesareownedbecausetheinvestorcompany
cannotexercisesignificantinfluenceorcontrol.
Req.2
a. Acquisition:
2011
2012
InvestmentinSAS(+A)
360000
Cash(A)
360000
Purchased12000sharesofSixCo.noparshares
at$30pershare.
b.
IncomereportedbySixCompany:
RevenueshouldnotberecognisedbythecompanyonthebasisofSixCo.incomeineither2011or
2012because,underthefairvaluemethod,revenueisnotrecogniseduntildividendsaredeclared.
c. Dividendsreceived:
Cash(+A)
3600
4800
Investmentincome(+R,+SE)
3600
4800
2011:$60000x6%=$3600
2012:$80000x6%=$4800
d. Fairvalueeffects:
Netunrealisedloss/gainSAS(SE)
24000
AllowancetovalueatmarketSAS
(XA)
24000
AllowancetovalueatmarketSAS(+XA)
12000
Netunrealisedloss/gainSAS(+SE)
12000
ComputationsforYearEndAdjustmentstoMarket:
YearMarketCost=AllowanceBalanceUnadjustedBalance=Adjustment
2011$336000$360000$24000$0$24000
(12000x$28)
20123480003600001200024000+12000
(12000x$29)
Req.3
2011
2012
a. StatementofFinancialPosition:
LongtermInvestments:
InvestmentinSAS(atmarket)
$336000
$348000
b. ShareholdersEquity:
Othercomprehensiveincome:
Netunrealisedgain/lossSAS
(24000
) (12000)
c. StatementofComprehensiveIncome:
Investmentincome
3600
4800
InterCompanyAccountingquestion3
PotterTextbookAP124,p692usethefollowingvariation:
CaseA20000shares
CaseB90000shares
Solutions:
Req.1
CASEA Thefairvaluemethodmustbeusedbythecompanybecauseitowns10%
(20000200000)ofthetotalshares.Whenownershipislessthan20%thefairvalue
methodmustbeusedbecausetheinvestorcannotexerciseeithersignificantinfluenceor
control.
CASEB Theequitymethodmustbeusedbythecompanybecauseitowns45%
(90000200000)ofthetotalshares.Whenownershipisatleast20%butnotmorethan
50%,theequitymethodmustbeusedbecausetheinvestorcanexercisesignificantinfluence,
butnotcontrol,overtheoperatingandfinancingpoliciesoftheothercompany.
Req.2
CaseA10%
CaseB45%
January10,2012:
InvestmentinSAS(+A)
300000
(20000sharesx$15)
Cash(A)
300000
Investmentinassociatedcompany(+A)
1350000
(90000sharesx$15)
Cash(A)
1350000
Purchasedordinarysharesat$15pershare.
December31,2012:
None1
Investmentinassociatedcompany(+A)
40500
Equityinearningsofinvestee(+R,+SE)
40500
CASEB$90000x45%=$40500
December31,2012:
Cash(+A)
12000
54000
Investmentinassoc.company(A)
54000
Investmentincome(+R,+SE)
12000
CASEA20000x$.60=$18000
CASEB90000x$.60=$54000
December31,2012:
Netunrealisedloss/gainSAS(SE)
120000
None2
AllowancetovalueatmarketSAS(xA)
120000
CASEA20000sharesx($9marketprice$15cost)
=$120000unrealisedloss
1
Notrecordedunderfairvaluemethod.2Notrecordedundertheequitymethod.
Req.3
CaseA
CaseB
December31,2012:
StatementofFinancialPosition(partial):
Investments:
Investmentinordinaryshares,MurdochCompany
$180000
$1336500
ShareholdersEquity:
Othercomprehensiveincome:
Netunrealisedloss/gainSAS
(120000)
None
StatementofComprehensiveIncome(partial):
Investmentincome
12000
Equityinearningsofinvestee
40500
CVPAnalysisquestion1
PotterTextbookM165,p870usethefollowingadditionalrequirements:
6.Whatsalesamount(quantityandtotalsales$)isneededtoearnanetprofitaftertaxof28000at
acompanytaxrateof30%
7.WhatpriceshouldPPPchargeperflowerarrangementifasalesvolumeof7000arrangementsis
expectedandthetargetprofitbeforetaxis$40000.Variablecostsremainthesameasperprevious
salesprice.
Solution:
1. (a)Fixed:Rent,salaries,depreciation.
(b)Variable:costofgoodssold,supplies,salescommissions.
2. Contributionmargin=Salesrevenuevariablecosts
CM=$56($56x58%)($56x7%)($56x5%)
CM=5632.483.922.80
CM=$16.80
Foreveryarrangementsoldat$56thereiscontributiontowardsfixedcostsof$16.80.
3. Breakevenpoint
=Fixedcosts/ContributionMargin
Breakevenpoint
=$77000/16.80
=4584unitssold
Alternativecalculation:
PricexQuantityVariablecostsxquantityfixedcost=profit
56xQ39.2xQ77000=0
Q=4584(roundedupasyoucantsellhalfaunit)
Breakevenpointindollars=unitssoldxunitprice
=4584x$56
=$256704
4. Requiredunitsalesfortargetreturn=(Fixedcosts+targetreturn)/contributionmargin
=($77000+$35000)/$16.80
=$112000/16.80
=6667unitsor$373352insales
Alternativecalculation:
PricexQuantityVariablecostsxquantityfixedcost=profit
56xQ39.2xQ77000=35000
Q=6667unitsrounded
5. Costisonlyonefactorthatneedstobeconsideredwhenlookingatviability.Otherfactors
willincludecontinuedaccesstoflowersandreliablelaboursupply,aswellascontinual
customerdemandtomeettherequiredsalesvolume.
6. PricexQuantityVariablecostsxquantityfixedcost=profitaftertax/(1taxrate)
56xQ39.2xQ77000=28000/(10.3)
Q=6965units(rounded)or$390040insales
7. PricexQuantityVariablecostsxquantityfixedcost=profitaftertax
Px700039.2x700077000=40000
P=55.914
CVPAnalysisquestion2
PotterTextbookM166,p870usethefollowingadditionalrequirements:
6.Whatsalesamount(quantityandtotalsales$)isneededtoearnanetprofitaftertaxof$36000
atacompanytaxrateof40%
7.WhatpriceshouldNickchargeperitemifasalesvolumeof16000arrangementsisexpectedand
thetargetprofitaftertaxis6%oftotalrevenue.
1. (a)Fixed:sellingandadministrationexpenses,depreciationexpense.
(b)Variable:costofgoodssold,salescommissions.
Depreciationisusuallyregardedasafixedcostwithinarelevantrangeofactivity.Shouldoutput
increasethendepreciationmayalsoincreaseifmoredepreciableassetsarerequiredtosupportthis
newlevelofoutput.
2. Contributionmargin=Salesrevenuevariablecosts
CM=$3486
CM=$20perunit
Businessmanagerswillusethisinformationtodeterminehowmanyunitsneedtobesoldto
coverfixedcostsandtherequiredprofit.
3. Breakevenpoint
=Fixedcosts/ContributionMargin
Breakevenpoint
=$280000/$20
=14000unitssold
Alternativecalculation:
PricexQuantityVariablecostsxquantityfixedcost=profit
34xQ14xQ280000=0
Q=14000
Abusinessmanagerwouldwantthisinformationtoknowhowmanyunitsneedtobesoldtocover
fixedcosts.
4. Requiredunitsalesfortargetreturn=(Fixedcosts+targetreturn)/contributionmargin
=($280000+$42000)/$20
=16100units
Alternativecalculation:
PricexQuantityVariablecostsxquantityfixedcost=profit
34xQ14xQ280000=42000
Q=16100
Salesrevenueindollars=unitssoldxunitprice
=16100x$34
=$547400
5. IndecidingwhethertoexpandNickneedstotakeintoaccountseveralfactors;arethere
extracustomerswhowanthisproduct,whatistherelevantrangeforthefixedcostswhen
volumeincreasessomeofthefixedcostsmayalsoincrease,andcanhegetaccesstothe
producttosell,andthestafftoselltheproduct?
6. PricexQuantityVariablecostsxquantityfixedcost=profitaftertax/(1taxrate)
34xQ14xQ280000=36000/(10.4)
Q=17000unitsor$578000insales
7. PricexQuantityVariablecostsxquantityfixedcost=profit
Px1600014x16000280000=[0.06x(Px16000)]/(10.4)
P=$35
CVPAnalysisquestion3
Completethemissingfigures:
Taxrateis30%
Salesprice
Unitssold
Variable
perunit
Expenses
FixedCosts NetProfitafterTax
1
$20
?
$11/unit
$15000
$8400
2
$20
?
$11/unit
$15000
10%ofSales
3
?
4000
$11/unit
$15000
14%oftotalcost
4
$22
3500
?
$15000
$14000
5
$22
3500
$11/unit
?
$15400
6
$20
5000
60%ofsales
$15000
?
1. PricexQuantityVariablecostsxquantityfixedcost=profitaftertax/(1taxrate)
$20xQ$11xQ$15000=$8400/(10.3)
Q=3000units
2. $20xQ$11xQ$15000=0.1($20xQ)/(10.3)
Q=2442units(roundedfrom2441.86)
3. Px4000$11x4000$15000=[0.14($11x4000+$15000)]/(10.3)
P=$17.70
4. $22x3500VCx3500$15000=$14000/(10.3)
VC=$12/unit
5. $22x3500$11x3500FC=$15400/(10.3)
FC=$16500
6. $20x50000.6x($20x5000)$15000=PAT/(10.3)
PAT=$17500
Finalexamrevisionquestions
CorporateSocialResponsibilityQuestion1
ConsiderthefollowingarticlecritiquingtheToyotaCorporationsmanagementofanacceleration
probleminitsvehicles.Yourtaskistoidentifywhetherthisissueisacorporatesocialresponsibility
issueforToyota,andifso,howToyotamightmanagethisdilemma.Inyouranswer,pleasereflect
ontheCSRdefinitionsandguidelinesdiscussedintheABDB.
Articlereference:
http://www.businessweek.com/managing/content/feb2010/ca20100210_477369.htm
Suggestedsolution
Thissolutionrequiresstudentstoreflectontheresponsibilitiesrequiredofcompanieswhendealing
withsociety.Toanextent,thesolutionmightbegreyoruncertain.TowhatextenthasToyota
actuallyletthisproblemgetworse,withoutaddressingit?TowhatextentdoesToyotaneedto
conductsocialreportinginwaysthathighlighttheproblemstheyarefacing,sothattheyhaveeven
greaterincentivetosolvethem?
Solutionguide
Forthissolution,weencourageyoutothinkaboutwhatcanbedonetoimprovetheirproblem
detectionpractices,andtheirreportingofthesameproblems.
Areastoconsider:
1. Identifytheextenttowhichtheaccelerationproblemmightbemanagedand
communicated,fromtheperspectiveofthefollowingsixareas,aspresentedintheCSR
lecture:
a. communityrelationsTowhatextentarethereavenuesforthecommunityto
directlyraisetheirgrievancesregardingaccelerationtoToyotamanagement,with
minimumtiersofcommunication?
b. productsafetyThiscategoryisattheheartoftheproblemwhatprocessesare
Toyotatakingtorectifytheproblem?TowhatextentisToyotarecallingandfixing
theproblempromptly,thenadequatelycompensatingemployees?
c. trainingandeducationReflectongeneralprocessesmanagementcouldtaketo
trainanddevelopemployeeskillsinordertominimisethecommunicationand
managementoftheproblem.
d. SponsorshipCanToyotaexhibitasenseofhumilityandgoodwillbysupporting
notforprofitcausesthathaveamandatetomanageoralleviatetheproblems
relatingtoproblemsassociatedtoaccelerationissues?(accidentprevention
authorities,speeding,sponsoringeventstoaidvictimsofroadaccidents,etc)
e. charitabledonationsToyotamaygenerallydonatefundstofamiliesofaffected
individualsasagestureofgoodwill,independentoflegalresponsibilities.
f. employmentofdisadvantagedgroupsThisareaisprobablyleastrelevantforthis
problematbest,itmayrequireustothinkabouthowinjuredcustomersornon
drivingvictimswhoareaffectedandloseemployment,areprovidedguaranteed
employmentbyToyotaIamstretching,however,whenraisingthispointin
relationtothesituation!
Accountingandethicsfinalexamrevisionquestion
JaneDoeisaCPAprofessionalaccountantandtaxagentwhohasbeenaskedtoadoptaseriesof
depreciationmethodsbyherlargestclient,thatarewellwithinthechoicesallowedbythetaxguide.
Sheisgenerallyhappytodothis,asthetaxguideallowshertodoso.Generally,herclientwants
hertoadoptanaccelerateddepreciationmethod,inordertomaximisetheirdepreciationexpense,
andsubsequentlyminimisetheirprofitandtaxpayable.
Towhatextentcouldthisproblembeanethicalissue,andwhatAPESprinciplesdoesitchallenge?
Whatarethethreatsthatmightcausehertonotevenperceiveanethicalproblem?Proposean
ethicalframeworkforthinkingaboutthisproblem,andtheresponseyoumightmaketothelargest
clientofJaneDoe,ifyouwereher.
Solutionguide
Thisproblemisclearlynotalegalissue,butcouldbeanethicalissue.Ifthenoncurrentassetsbeing
depreciatedareactuallyusedinamannerthatdoesntreflecttheaccelerateddepreciationmethod,
itisnotideallyappropriateforJanetousethem.Ethically,depreciationexpensemustberecorded
inamannerconsistentwithhowtheassetisused.ReflectingonthefiveAPESethicalprinciples:
1. Integritytheextenttowhichwearestraightforwardandhonestinourreporting
2. ObjectivityUnbiasedjudgementinagivensituation
3. ProfessionalcompetenceandduecareMaintainingsufficientknowledgeandkeepingit
updated
4. ConfidentialityDisclosinginformationthatshouldnotbe,intheinterestoftherelevant
organisation
5. ProfessionalbehaviourActinginawaythatdoesnotdiscredittheprofession.
TowhatextentmightJaneadoptinganaccelerateddepreciationmethodbreachanyoftheabove
fiveprinciples?Discusstheextenttowhichtheyareaffected.Ithinkthatinthissituation,integrity,
objectivityandprofessionalbehaviourarethemostrelevantprinciples.
WhymightJanenotregardthisanethicalproblemorpursuethesuggestionbytheclient
irrespectiveoftheirbeliefontheethicsofthesituation?Considerthe5threatstoethicalconduct,
describedbytheAPESs:
(a)Selfinterest;
(b)Selfreview;
(c)Advocacy;
(d)Familiarity;and
(e)Intimidation
Themostrelevantthreatsgiventheabovesituation,areprobablyselfinterest,advocacyand
possiblyfamiliarity,ifJanehasalongtermrelationshipwithherlargestclient.
HowmightJanetakeastepback,andreflectethicallyaboutthisproblem?ConsidertheAPES
frameworkforethicalthinking:
(a)RelevantfactsJanehastochoosedepreciationmethodsthatmaximisetaxsavings.
(b)Ethicalissuesinvolveddepreciationshouldrelatetohowanassetisusedoveritsusefullife,not
fortaxpurposes,fromareportingperspective.
(c)FundamentalprinciplesrelatedtothematterinquestionTheapplicationofanaccounting
concept(depreciation)inwaysthatarenotconsistentwithitsintendedpurpose.
(d)Establishedinternalprocedureswhichmightrepresentsafeguardsagainsttheidentifiedthreats
Janemightreflectontheextenttowhichsheiswillingtoallowhernametobeassociatedtotax
reductionstrategiesthatarelegal,butnotethical.Shemightinsisttoclientsthattheyadopt
depreciationmethodsthatareconsistentwiththeiruse.
(e)AlternativecoursesofactionShemightalsoexplaintoclientsthatwhattheysaveintaxesnow,
theywillloselater,whentheypaymoretax,astheirdepreciationcostsarelowerinthefuture.
Overall,thiscaseforcesstudentstothinkabouthowtheymighttackleasituationwheretheyare
incentivisedtoactlegally,butnotnecessarilyethicallyinamannerconsistentwithaccurate
reportingtothegovernmentstakeholder(Taxationoffice).