1. How would this behavior affect customers?
It the automotive industry will keep on selling parts and services that their customers do not really need, their customers would be unwilling to accept their service. They will stop purchasing this parts and services from the automotive industry until the company looks for a way forward of solving the problems. In addition, the customers will no longer trust the automotive industry hence will find a way of protecting themselves from unwanted products.
How might customers attempt to protect themselves against this behavior?
Customers may attempt to protect themselves through hiring independent experts who may confirm that the effort is required in provision of good services. Consequently, they may reduce their demand of parts and services from the industry hence look for a better industry that will help them meet their needs. If the industry will not make any decision, customers may demonstrate against consumption of unwanted goods and this will impose a great threat to the industry.
How would this behavior probably affect profits and employment in the automotive service industry?
This behavior will lead to decrease of the company’s profits once the customers realize that the company keeps on manufacturing goods that are of poor quality. The company may end up loosing many customers hence their sales will decrease. This will lead to increased costs and the company may be forced to close down. On the other side of the employment, workers might become less productive and others may become untrustworthy hence the company may end up making losses. Imposing tough laws in the working environment may lead to cases of corruption, undermining of the industry and conflict of interest and other associated problems may result.
2. Why would reclassifying period costs as product costs increase this period’s reported earnings?
Reclassifying period costs increased because of the increased advertisement costs as product costs increased implying that the money was directly injected into manufacturing rather than advertising and administrative costs. This statement seems more outdated meaning that the statement of the company as the Gallant puts it is not clear. This is a false statement of increasing the price according to the indication of the report earnings. Holding off a switch of expenses until the next year will make Kranbrack Corporation to keep progressing backwards.
Do you believe Gallant’s actions are ethical? Why or why not?
Gallant’s actions are unethical because the statement that he makes about canceling and postponing orders to the following year including canceling of orders with the suppliers seems unnecessary. The case of delaying planned maintenance and training programs are unethically wrong. All of these statements are wrong indicating that Gallant has been participating in corruption and embezzlement of the company’s funds hence he is looking for a way of defending himself.
In addition, he might be okay with the solution of reducing things like advertisements and travel expenses. However, managers should look at other features when it comes to better management of the business. For instance, maintenance of machinery is essential because it may lead to increased costs hence the company may end up incurring costs that may affect the financial budget. Gallant could have not mentioned about postponing orders with the suppliers because if the corporation have already made an agreement with the suppliers and they cancel it, they may affect their relationships or it may end up to be a court case.
3. Explain why this would be the case for companies that use absorption costing?
Under the adsorption cost, companies that use this method are required to reduce the gross profits of their manufacturing costs and their inventory cost should be transferred according to the cost of goods sold. The underlying principle behind the absorption cost is that it makes a measured product to be accounted as a complete cost. Costs such as fixed costs on manufacturing are difficult to recognize because of a specific unit of production and this does not actually mean that they are not under the cost of production. Therefore, the United States automakers will try to improve on their competitiveness by considerably lowering their inventory cost hence reducing their profits.
How would you feel as a manager if your inventory reduction efforts resulted in lower profits and a smaller bonus?
If my inventory reduction efforts results in lower profits and a smaller bonus, I will change the marketing environment through introducing the new marketing opportunities. I will turn this new marketing opportunities into profits by planning a new strategy for the automotive company. I will introduce a method of satisfying customers in order to increase the sales of the products. I will employ the strategy that meets the needs of the customers especially focusing on luxury features thus may enable the company to earn more profits.
In addition, through use of the company’s objectives I will reduce inventory because it is a risk venture and introduce a set of pricing strategies. This price will spell out what price condition the companies face and their solutions. In addition, the policies will explain the flexibility of the prices and to which level the price will be set in the invention life cycle. Lastly, I will introduce a method on marketing mix in order to successful increase the sales of the company.
4. Explain why Atkins and Granger behave in this manner and describe the benefits they expect to realize from the use of budgetary slack.
In the conversation of Atkins and Granger, they behaved in that way because they wanted to plan for a formal quantitative terms. As such, they wanted to use budget to control the activities of their firm and specifically the estimate of their sales and production because they are the ones that determines the balance sheet and budget income statement. The benefits they expect from the use of budgetary slack include, flexibility in operation such as an additional margin or unrestricted expenses incase adverse conditions arise. Consequently, the pressure of meeting the present earnings of the year for every share will enable them to position their expenditures into the sales of the present year.
Explain how the use of budgetary slack can adversely affect Atkins and Granger.
The use of budgetary slack can adversely affect Atkins and Granger because it may reduce the overall effectiveness of the organizational plans. This will force them to take actions such as cost changes or reduce promotional expenses in order to improve their income. This elimination may not accomplish their objectives incase there would be no market changes. In addition, it will limit their objectives and goals evaluation through use budgetary slack information.
By referring to the IMA’s Statement of Ethical Professional Practice, explain why the use of budgetary slack may be unethical.
The budgetary slack may be unethical because in some cases most accountants can overestimate or underestimate the amount of revenue that will result in a certain period. This policy prevents budgets from working appropriately and it is unethical because many organizations deliberately twist figures so that they can be able to achieve certain accounting goals.
5. How did Preston Lansing probably “rig” the standard costs—are the standards set too high or too low? Explain.
Preston Lansing rigged the standard costs through following a practice of saving up the favorable variations that he used to create a smooth pattern of growing profits in the first three quarters followed by an extremely fourth quarter. The standards set are too high because when products are set at a lower cost than the normal standard, they produce a favorable variance. Thus, the cost of goods sold and the variance should have the correct cost in order to yield better results.
Should Preston Lansing be permitted to continue his practice of managing reported profits?
Preston Lansing should not be allowed to continue with this practice of managing reported profits because the standard quantity are set too high and the ordinary favorable variances will only result from the operations. Preston should be careful because the inventory might be overvalued due to wrong standards. Therefore, incase there are numerous inventory at an exaggerated cost, the cost of goods sold will be reduced on the income statement because of too much favorable variances. Actually, Preston has been trying to build inventory in every quarter but this idea distorts the quarterly income of the company hence may mislead the external users of the financial statements.
What should Stacy Cummins do in this situation?
Stacy Cummins does not have any alternatives because she already took the case to the president of the Merced Home Products, but he did not bother. When she asked if the Board of Directors were a ware of Lansing’s actions, she was told that everybody in the company is aware of what Lansing is doing. Therefore, she will quietly table the issue to the audit committee of Board of Directors and carefully tackle the issue in an ethical way to avoid creating conflicts in the company.