Ethics in Managerial Accounting

Marcus Lim, the cost accountant for Hi-Power Mower Company, recently installed activity-based
costing2 at Hi-Power’s St. Louis lawn tractor (riding mower) plant where three models, – the 8-
horsepower Bladerunner, the 12-horsepower Quickcut, and the 18-horsepower Supercut – are
manufactured. Marcus’s new product costs for those three models show that the company’s traditional
costing system had been significantly under costing the 18-horsepower Supercut. This was due primarily
to the lower sales volume of the Supercut compared to the Bladerunner and the Quickcut.
Before completing his analysis and reporting these results to management, Marcus is approached by his
friend Ray Pon, who is the production manager for the 18-horsepower Supercut model. Ray has heard
from one of Marcus’s staff about the new product costs and is upset and worried for his job because the
new costs show the Supercut to be losing, rather than making, money.
At First Ray condemns the new cost system, whereupon Marcus explains the practice of activity-based
costing and why it is more accurate than the company’s present system. Even more worried now, Ray
begs Marcus, “Massage the figures just enough to save the line from being discontinued. You don’t
want me to lose my job do you? Anyway, nobody will know.”
Marcus holds firm but agrees to recompute all his calculations for accuracy before submitting his costs
to management.
You are required to provide answers to the following questions addressing all the points outlined in the
questions using the facts stated above as well as the IMA Statement of Ethical Professional Practice. The
assignment is worth 95 points as outline below:
(a) Provide answers to the following questions using full grammatically correct sentences and
paragraphs. Ensure that your response is in a professional tone. (10 points)
(b) What are the over-riding principles that management accountants are held to under the IMA
Statement of Ethic Practice and why are they important? (17 points)
(c) Who are the stakeholders3 that are affected by Marcus’s actions? Be specific and indicate how
they are impacted (positively or negatively) and why. (17 points)
(d) What are Marcus’s ethical obligations to the company? To his friend? (17 points)
1 Adopted from Managerial Accounting, Tools for Decision Making, Wegandt, Kimmel, and Kieso, 5th edition, pp.
2 Activity-based costing systems are more accurate than traditional costing approaches because they provide a
more precise allocation of indirect costs. Greater precision of costing enhances decision making by
3 A stakeholder is any person or group that would be impacted by this issue.
(e) Using the IMA Statement of Ethical Professional Practice, identify the standards that Marcus
would violate should he go along with Ray’s request. Be specific and explain why the standard
would be violated. (17 points)
(f) How could Marcus help his friend yet still uphold his ethical obligations? (17 points)

Sample Solution