MANACC SAT 3-6 PROF.

SOLOMON
TANTENGCO

BALANGAT, NG, SAHILAN, SALVANI, SIBAL,

CASE 7-20 ETHICS AND THE MANAGER

1. Under the Variable Costing, manufacturing overhead is incurred
in the period that a product is produced. While under an
absorption cost method, management can push forward costs
to the next period when products are sold. However, we can
use the CVP analysis when sales and production is the same
and absorption costing net operating income is the same as the
variable costing net operating income.
Selling price............................ $120.00
Less variable cost per unit.......
87.20
Unit contribution margin......... $ 32.80
Unit sales (target
profit)
410,000 units

= Target net profit + Fixed

expenses
Unit contribution margin
= $2,000,000 + $11,448,000
$32.80 per unit

2. Based from above 410,000 units, unit product cost will be the
following:
Direct materials.................................
Direct labor.......................................
Variable manufacturing overhead.....
Fixed manufacturing overhead
($6,888,000 410,000 units).........
Absorption costing unit product
cost.................................................
Sales (410,000 units $120 per
unit)..................................................

$57.2
0
15.00
5.00
16.80
$94.0
0
$49,200,000

MANACC SAT 3-6 PROF. SOLOMON

TANTENGCO

BALANGAT, NG, SAHILAN, SALVANI, SIBAL,

Cost of goods sold

38,540,000
(410,000 units $94 per unit).........
Gross margin.......................................
10,660,000
Selling and administrative
expenses:
Variable selling and
$4,100,00
administrative (410,000 units
0
$10 per unit)...............................
Fixed selling and
4,560,000
8,660,000
administrative................................
Units in beginning
Net operating income.........................
$02,000,000
inventory........................
Plus units produced...........
3. The
current
Q
rate of
sales or
Units available for sale......
Q $1,672,000
profit is
Less units sold..................
400,0 managers
only. The
00 achieve a
want to
Units in ending
Q profit of
target
inventory........................ 400,000 $2,000,000
thus, giving a $328,000 increase to achieve. This leads to a
conclusion that production should be increased so sales will
also go up. However, inventories in turn will be affected and
will grow up. Thus, the company should defer the fixed
manufacturing overhead in the ending inventory. See below
computation.
The amount of production, Q, required to defer $328,000 can
be determined as follows:

Fixed manufacturing = $6,888,000

overhead per unit
Q
Fixed
= Fixed
manufacturing
manufacturing
overhead deferred overhead rate
in inventory
per unit
$328,000 = $6,888,000

x number of units
added to inventory
x (Q-400,000)

MANACC SAT 3-6 PROF. SOLOMON

TANTENGCO

$328,000 x Q
$328,000 x Q
$6,560,000 x Q
Q

BALANGAT, NG, SAHILAN, SALVANI, SIBAL,

Q
= $6,888,000
= $6,888,000
= $6,888,000
= 420,000 units

x (Q-400,000)
x Q-$6,888,000 x
400,000
x 400,000

4. The absorption costing income statement

Sales (400,000 units $120 per unit)
Cost of goods sold
(400,000 units $93.60 per unit)....

$48,000,00
0
37,440,00
0
10,560,00
0

Gross margin......................................
Selling and administrative expenses:
Variable selling and administrative
(400,000 units $10 per unit)....... $4,000,000
Fixed selling and administrative....... 4,560,000 8,560,000
Net operating income.........................
$ 2,000,000

5. Ideally the suggestion of building up inventories is good since

this will increase profits. But in order to do this strategy,
inventories must be growing every year. And one of the negative
effects of this is that large inventories tie up capital, needs
additional space and cost for storing, sometime results to
operating problem and theres this also a risk of profit loss once
that product was seen obsolete in the market. Once these
problems took effect, it will have a negative impact on the net
operating income. Moreover, theres also an ethical issue in this
suggestion. It seems that the managers are willing to do anything
even at the expense of the company just to get their bonus. By
inflating the inventories the net income would temporarily

MANACC SAT 3-6 PROF. SOLOMON

TANTENGCO

BALANGAT, NG, SAHILAN, SALVANI, SIBAL,

increase but as discussed a while ago there are a lot risks in this
strategy.
6. The bonus plan based in absorption costing net operating
income is really subject to manipulation by changing the amount
that is produces. This should be changed to variable costing net
operating income, since this is less subject to manipulation.
Moreover, the bonus plan of the Board of Directors should be
changed. It shouldnt be all or nothing bonuses, because by doing
this the managers tend to be greedy and desperate just to get the
bonus, and this is where the unethical and shady practices comes
in. Instead of giving all or nothing bonus, they should just assign
bonuses for every income that they achieve. The amount of bonus
grows as the target income increase. By doing this, we could
moderate the greed of the managers.