Question

Susan Mills, Company B's chief accountant, has developed an automated costing system that helps track the cost of production activities. This system is capable of accurately measuring and allocating post-manufacturing activities, such as selling, promotional, and distribution activities, in such a way where Company B gets a more detailed view of its product costs. One of the benefits of this system is that it allows Company B to determine which product lines are more profitable.

When Susan implemented the new costing system, she realized that the company's current period profits would increase significantly if the new product cost information was used for inventory valuation on the financial statements. Susan has been under intense pressure to improve the company's profits, and this would be a quick and effective way for her to help meet the company's short-term profit goals. As a result, Susan has decided to use the automated costing system to determine the company's profits.

1. Why do the company's profits increase when the new costing system is implemented?

2. Is Susan acting ethically by using the new costing system for determining the company's profits? Explain your answer.

Answer 1

SOLUTION

1. The company's profit increases when the new costing system is implemented because this new system will help company to calculate there post manufacturing activities such as selling,promotional,and distribution activities.

It help to cut the company's manufacturing or producing cost which will eventually increase the profit and this newly implemented costing system is also managing to determine which product line company should use so they can earn more profit.

2. Yes susan acting ethically by using the new costing system for determining the company's profit because if her decision for implementing new costing system is increasing the company's profit then this can be adopted. GAAP is not a legal boundation which needed to be follow it is only generaly accepted accounting principle so if by following new costing system the company net income will increase so there is nothing unethical in it.