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Please list the ethical standards, as provided by the Institute of Management Accountants (IMA) Statement of Ethical Professional Practice, which are being jeopardized by Paul hiring George the Plumber, and justify why these standards are being jeopardized.

Ethical Standards Jeopardized

The institute of management accountants has issued a statement of ethical professional practice to be followed by the individuals carrying a certified degree of management accountancy. As per this statement, the members of IMA must act in the most ethical manner while discharging their professional duties. It primarily covers four ethical standards to be followed by the management accountants. They are: competence, confidentiality, integrity and credibility (IMA, 2017).

In the present case, George has been appointed as the management accountant of Fridges-R-Fun. George is the licensed plumber and is also the relative of the general manager of the company. Therefore appointment of George as a management accountant of the company will jeopardise following ethical standards:

Competence: This standard requires the management accountant to perform those professional duties that are necessary as per the laws and regulations and technical standards of the profession. Since, George is a licensed plumber and not the holder of degree of management accounting, he cannot be appointed as the management accountant. It cannot be expected from the member of other profession to provide appropriate and accurate information to the management in the areas of management accounting due to lack of proper knowledge in this particular field (IMA, 2005).

Integrity: This standard requires the management accountant to resolve any conflicts of interest arising in the organisation in which he is appointed as the management accountant (IMA, 2018). In the present case, George is the brother in law of Paul, the general manager of company. Therefore, there are chances that George may discredit the professional obligations to protect the personal relation with the manager of company. 

Appraisal Costs

Prevention Costs

Internal Failures

External Failures

Inspection on assembling line

System Development

Rework on assembly line

Warranty repairs of fridges

Field testing at customer sites

Technical support to suppliers of compressors

Warranty replacement of fridges

Technical support to suppliers of pipes

The quality management focuses on creation of high quality and high performing product and services which can meet the expectations of the customer. Quality management in any firm requires spending of majorly two sorts of quality costs i.e. prevention cost and appraisal costs (Ahmed Al-Dujaili, 2013). Such costs are incurred by the firm in order to reduce the two other types of quality costs which are internal failure costs and the external failure costs. It is more important to prevent the defects instead of identifying and fixing them out of the products and services. For the purpose of achieving quality management the firm has incurred these costs. In year 1 the firm did not take up any preventive measures and hence it did not incur any preventive costs. Also, in the first year no appraisal costs were incurred. The firm, therefore, had to face few internal and external failures. To deal with quality failures firm had to carry certain reworks for the internal failures. However, certain failures and defects were encountered by the customers after such products were shipped to them. These failures were the external failures and costs warranty repairs and warranty replacement costs were incurred to satisfy the customers who experienced the product failures or defects while using them. The appraisal cost of the business has increased since year 1 to year 3 from nil to $ 750 and this shows that the firm is taking necessary steps to identify the defects of the products. This practice of the firm has enabled it to face less internal as well as external failures. Therefore, the cost of internal failures has decreased from year 1 to year 3 by $ 450 and also the cost of external failures has declined by $ 500 in year 3 since year 1. 

Quality Management Costs

As per John who is the owner of Fridges-R-Fun, it is better to incur costs to deal with the internal and external failures rather than spending monies on reworking on the defective products and on repairing and replacing the defective products as a part of warranty scheme. However, as per Ringo, the qualified management accountant, company must take up preventive measures to prevent the occurrence of failures and to identify and fix the reported errors before shipping them to the customers. This practice will reduce the excessive spending on warranty and replacement costs. Paul, the general manager, is in the favour of Ringo’s recommendations. They believe that though the implementing practices like inspection, testing, system development and technical support will increase the preventive and appraisal cost for some time but in the long run, it will amount to reduction in the overall quality costs by reducing the chances of internal or external failure.

Question 3.2:

If Fridges-R-Fun continues with Ringo's suggestion in year 4, it will result in further reduction of overall quality costs as the chances internal and external failure will be reduced with the adoption of preventive and other measures to prevent and detect the product defects on the right time.

If Fridges-R-Fun stops accepting Ringo's suggestion in year 4, it will result in increase in the changes of internal and external failure costs as now preventive and other measures will be taken up to prevent and detect the product errors and defects on the right time. Though, this practice will nullify the preventive and appraisal cost but the warranty and reworking cost will increase significantly.  

 

High Low Method to estimate variable and fixed costs:

 

Units

 Costs

 

Highest Units delivered

600

 $                                  6,200.00

 

Lowest Units delivered

350

 $                                  3,700.00

 
 

Variable Cost per unit=

Change in Cost

 

Change in Number of Units

 
 

= $6200-$3700

 

    600-350

 
 

=$2500

 

    250

=$10

Variable cost per unit

10

 

Total number of units sold

600

 

Total Variable Cost

6000

 
 

Total Cost incurred in April

6200

 
 

Fixed Costs

200

 
 

Variable cost per unit

10

 

Total number of units sold

350

 

Total Variable Cost

3500

 
 

Total Cost incurred in February

3700

 
 

Fixed Costs

200

 

The difference between the actual expenses as reported by the business of Fridges-R-Fun and the estimated expenses under High Low Approach is due to under absorption of overheads. Using the high low approach, the predetermined variable overhead rate is $ 10 and the expected overheads are determined using this rate only. Therefore, lesser amount of variable overheads is applied to the productions units than the delivery expenses that were actually incurred.

Month

Units

Expected

Actual

January

450

 $                                  4,700.00

 $                                                       4,710.00

March

400

 $                                  4,200.00

 $                                                       4,300.00

May

500

 $                                  5,200.00

 $                                                       5,300.00

June

450

 $                                  4,700.00

 $                                                       4,700.00

Total

 $                                18,800.00

 $                                                     19,010.00

Predetermined overhead recovery rate=

Total Fixed Overhead

Direct Machine Hours

Welding Function

$250000

   7500

Fixed overhead rate

$33.33

Variable overhead rate

$1.5

$34.83

Predetermined overhead recovery rate=

Total Fixed Overhead

Direct Labour Hours

Assembly Function

$50000

  5000

Fixed overhead rate

$10

Variable overhead rate

$2

$12

Total Overhead Cost Applied

Welding

 Formula

 Workings

 Amounts

Fixed

Actual Machine Hours * Predetermined fixed overhead rate

(50*33.33)

 $  1,666.67

Variable

Actual Machine Hours * Estimated variable overhead rate

(50*1.5)

 $        75.00

Total

 $  1,741.67

Assembly

Fixed

Actual Labour Hours * Predetermined fixed overhead rate

(40*10)

 $     400.00

Variable

Actual Labour Hours * Estimated variable overhead rate

(40*2)

 $        80.00

Total

 $     480.00

Manufacturing Cost Recorded for Job 262

Welding

Assembly

Direct Material

 $                         500.00

 $     125.00

Direct Labour

 $                         250.00

 $     750.00

Manufacturing Overheads

Variable

 $                           75.00

 $        80.00

Fixed

 $                     1,666.67

 $     400.00

Total Manufacturing Cost

 $                     2,491.67

 $  1,355.00

Total Manufacturing Cost recorded for Job262

$ 3,846.67

Question 5.4:

Unit product Cost

Total cost of Job 262

$3846.67

$384.67

Number of units in Job 262

10

Since in welding function, more machine hours are used per job than the labour hours and hence the appropriate basis to allocate the welding overheads is machine hours. However, in the assembly function more of labour hours are consumed and hence it is more reasonable to allocate overheads related to assembly cost on the basis of labour hours rather than machine hours. 

If the estimated variable manufacturing overhead rate for the welding function is increased from $ 1.5 to $ 3, there will be no impact on the total assembly overhead cost as the assembly overheads are to be allocated on the basis of labour hours and machine hours are used to allocate the welding overheads. 

Key performance indicators are the areas which define whether the business is performing effectively and efficiently to achieved the desired results (Hilton & Platt, 2013). In the present case of Fridges-R-Fun, the firm has adopted KPIs on the basis of 6 principles but the company cannot be said to be the advanced user of KPI as per Schrage and Kiron since the company KPI’s works on the principle that it should focus mostly on the sales. However it is not correct, the firm must emphasise more on the value and satisfaction offered to customers to grow and survive. Further, the company works on the principle that KPIs must be reviewed annually which is not appropriate. Rather, the intervals of review of KPI’s must depend on the sensitiveness of KPI and it may be taken on weekly or monthly basis. Moreover, the belief that KPIs are private information and hence must not be shared with the employees of the company is not justifiable. Rather, the firm must share the KPI information with all the personnel so that they can effectively be achieved (Schrage & Kiron, 2018).

The firm must change changes its focus from mere sales to the customer satisfaction through improved quality management. It must also introduce such policies to review the most significant and material KPIs on weekly or monthly or on more frequent intervals than on annual basis. Also, the firm must share KPI information with the employees so as to provide them the freedom to effectively undertake appropriate decision making. 

Limitations of cost plus pricing:

  • The cost plus pricing method discourages the containment of cost and efficiency especially in the case of stand-alone projects.
  • It is generally believed that cost plus pricing method guarantees to cover the costs. However, in real practices, the volume of sales is predetermined and fixed cost is allocated on the basis of such estimation which often leads to miscalculation. Hence, cost plus price model neither guarantees covering of cost nor earnings of profits.
  • This method also ignores the key factors like willingness of customers to pay and the prices of competitors and therefore it leads to pricing decisions that are completely off base (Dholakia, 2018).

It basically prices the product on the basis of value derived by the customer by using the product and not on the basis of cost involved in its production (Garrison, 2010). Value based pricing emphasises on the customers. In the present case, where the firm is more focused on managing its quality of the products, the value based pricing is more beneficial than the cost plus pricing as the improved quality of the product will enhance the worth of the product for the managers and they will be willing to pay more for the value derived from the best quality products. This will ultimately lead to higher profitability. 

References:

Ahmed Al-Dujaili, M.A., 2013. Study of the relation between types of the quality costs and its impact on productivity and costs: a verification in manufacturing industries. Total Quality Management & Business Excellence, 24(3-4), pp.397-419.

Dholakia, U., 2018. When Cost -Plus Pricing is a good idea. Available at: < https://hbr.org/2018/07/when-cost-plus-pricing-is-a-good-idea> Accessed on: 06.08.2018.

Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A., 2010. Managerial accounting. Issues in Accounting Education, 25(4), pp.792-793.

Hilton, R.W. and Platt, D.E., 2013. Managerial accounting: creating value in a dynamic business environment. McGraw-Hill Education.

IMA, 2005. IMA Ethics Resources for Accounting and Finance Professionals. Available at: < file:///C:/Users/System04091/Downloads/ima_ethics_resources.pdf> Accessed on: 06.08.2018.

IMA, 2017. IMA Statement of Ethical Professional Practice. Available at: < file:///C:/Users/System04091/Downloads/ethics_prof_prac_full.pdf> Accessed on: 06.08.2018.

IMA, 2018. Ethics Centre. Available at: < https://www.imanet.org/career-resources/ethics-center?ssopc=1> Accessed on: 06.08.2018.

Schrage, M. & Kiron, D., 2018. Leading with next-generation Key Performance Indicators. Available at: < https://sloanreview.mit.edu/projects/leading-with-next-generation-key-performance-indicators/> Accessed on: 06.08.2018.

Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and control. Issues in Accounting Education, 26(1), pp.258-259.

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