Background:
Andrew Benthan is the CEO of Freyda Manufacturing Co., a US public company whose stock is
traded on the NYSE. At the beginning of 2018, Benthan met with analysts and provided his
outlook for the company’s performance that year – an ambitious earnings growth target of 25%
over the 2017 results. Unfortunately, the company’s performance has not matched his projections
and it has become clear by December 2018 that unless the company takes drastic measures, the
earnings growth target will not be met.
At the beginning of December 2018, Andrew has the following conversation with Lily Vimond,
the company’s CFO (chief financial officer):
“Lily, the numbers are not looking good for meeting the 2018 earnings growth target,”
Andrew said. “We have to reexamine the books to find a way to increase our earnings for the
year.”
“I understand your concerns about the earnings growth in 2018, Andrew; however, I am
confident that the company’s records to date are accurate,” Lily responded.
“Well, I’m asking you to take another look at them. Please make absolutely sure that all expenses
recorded as period costs are correct. I bet some of them can be reclassified as product costs.
After all, we’re on track to have a lot of inventory on hand at the end of the year. I would like
you to review all those period cost transactions and let me know what can be recategorized as a
product cost,” Andrew said.
“I understand what you’re looking for, but I don’t think-” Lily started to say when Andrew
interrupted her.
“I’m sure you’ll be able to find some reclassifications, and if it makes you feel better, we can
keep this between you and I,” he said.
Lily wasn’t sure how to reply, so she said she would have her team get to work on it right away.
Andrew added, “Oh, and here’s another idea… as you look ahead to the last few weeks of the
year, think about which large costs we haven’t incurred yet that you feel are absolutely necessary
to take this year and which ones we can put off until next year.”
“Did you have anything specific in mind?” Lily asked.
“Well, for starters we have that machinery maintenance scheduled to happen before the year
ends, as well as several employee training sessions, all of the sales team-related travel costs for
the big annual industry sales convention, and three pending orders to be finalized with our
material suppliers. I would start by reviewing the costs for these activities and see what we can
afford to do this year and what can wait until 2019,” Andrew said.
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“I can get my team to gather that cost information as well, and then we can go over it together to
discuss how you would like to proceed,” Lily replied.
“Thank you, Lily. I know you won’t disappoint me. I’m counting on you to make this happen.
Let’s go over it next week,” said Andrew.
As Lily prepares to bring her team together for an emergency meeting to discuss these urgent
tasks, she thinks back to the 2018 budget preparation process. At the time, she expressed her
concern that the projected earnings growth target for the year was extremely ambitious and relied
on ideal operating results for the company, which would likely be difficult to achieve. However,
she also knows that Andrew’s bonus for 2018 will be based on meeting that target.
Instructions: Please read the background above and then respond to the following questions.
- Andrew’s first suggestion for Lily is to reclassify period costs as product costs. Explain
why this would affect the company’s earnings. (Hint: think back to Chapter 2 and the
financial effect of classifying costs as period vs. inventoriable.) - Andrew’s second suggestion for Lily is to identify costs that can be delayed until 2019.
He gives four examples of costs that Lily might decide to postpone until next year.
Choose one of these costs and explain how it might impact the company if that cost is not
incurred as originally planned in 2018. Consider the impact of this choice not only from a
financial (i.e., cost-savings perspective) but also from an operational perspective. If that
cost is not incurred, what might be the outcome? - Do you believe that Andrew’s suggestions for Lily’s team are ethical? Why or why not?
- What would you suggest that Lily do? Would you be comfortable disclosing that choice
on the front page of the Wall Street Journal? - What change(s) would you recommend Freyda Manufacturing Co. make in 2019 so that a
similar circumstance does not happen again?
Due date: Wednesday, April 24th, 2019 your writeup should be posted on Blackboard by
4:30PM (to be checked for plagiarism using SafeAssign) and handed in at the beginning of class
Please note:
• Maximum word count should be about 500-600 words. There is no minimum word count.
• If you want to read more about ethics in managerial accounting, Chapter 1 of our
textbook contains a section called “Professional Ethics” (see pages 16 – 18).
• This assignment should be completed individually. I’m looking for your unique ideas
and perspectives in this assignment, not something you’ve borrowed from someone else
(whether in class or online).
• Please pay attention to the University’s policy on plagiarism when writing your
assignment.
• Late assignments will receive a 10-point deduction for each day late.
• An assignment not received in both formats will receive a 10-point deduction.
Sample Solution
