Ace Fertilizer Ima
Ace Fertilizer Company Abby Conroy was tasked with calculating an effective quote for Breeland Ltd. , she chose the activity based accounting costing system since it more accurately captures the related costs. A special order was placed by Breeland Ltd. with Ace Fertilizer Company. The did not plan to order more of this product in the future. Based on Ace’s policy, the special order included disposal costs for any used materials in the event no other orders existed for the unused materials at the time the Breeland contract was signed.
Abby correctly calculated the total direct material and labor costs and accurately arrived at the indirect costs using the ABC method and used cost activity pools that make sense for the company and product. She incorrectly included the organization-sustaining costs which are not related to any specific product so should not be included. Abby incorrectly calculated the mark up cost by dividing 80% from the cost rather than multiplying so the markup and the total cost to Breeland has been overstated by $193,500.
This would ultimately produce a higher profit with lower costs and a higher customer margin but would be inconsistent with Ace 80% markup policy. Revisions could be made and an accurate quote could be provided to Tom Brennen for approval. During personal time over the weekend, George was presented with a possible opportunity to sell the unused portion of Breelands special order materials to his brother Josh. On Monday, George wanted to leave the Breeland quote as is, whereas Abby wanted to revise it to exclude the sale of materials to Josh plus additional charges.
George is correct to leave the quote unchanged, since there are no new orders for the additional XO-1600 yet even though he and Josh discussed it during personal time. Company policy dictates that the special order customer would be billed for unused materials in the absence of another existing order for the same materials. It would be putting the cart before the horse to recalculate new costs and inform Breeland of a possible price revision before Josh confirms, especially since the information exchange occurred over the weekend during a personal family event.
It is likely that Josh will purchase the additional 10 gallons of product but that can’t be confirmed until later in the week. It is not correct however that Breeland should incur those material costs if Josh does purchase them. George is not correct in how he would handle the transaction with Breeland should Josh purchase the materials. The materials should not be double billed and disposal fees should not be incurred by Breeland if this event never occurs.
From an IME standpoint, Abby’s costing calculations were flawed which speaks to her competency as a management accountant, but her integrity was consistent with IMA ethical standards. Her markup mistake was most likely a clerical one only that could easily be fixed however including organization-sustaining costs in the client quote is a larger concept level mistake. The first error places a small black mark against her level of competence. Since she has developed an excellent level of expertise with Ace, I would suggest that it could be overlooked.
The second error however is larger and would suggest her level of competence might be questioned. Following Georges’ conversation with Josh, Abby was keen on modifying the bid to include a materials reduction of $16,000, elimination of the $10,000 disposal fee for unused materials and a reduction in organization sustaining overhead costs of $52,000. Including the 80% markup, this would save Breeland $93,600 if Abby’s original quote had been correct and the numbers were not modified to remove the organization-sustaining error.
It is clear that reworking the original quote to accommodate a new client would benefit Breeland, however the conversation between George and Josh was personal and not final, even though Josh was able to preliminarily confirm he would place the order. The original quote would represent a more timely quote since future prospects had not yet materialized and would be consistent with Ace’s company policy. Since Georges’ conversation with Josh would be considered confidential in nature with respect to Breeland, it would limit Abby’s permission to inform them of any possible rework of the quote without express consent or approval of George.
Since Tom Brennen would need to review any reworked quotes anyway, it doesn’t seem likely that Abby would violate any confidentiality requirements as directed by IMA Standards. Georges’ suggested game plan of billing the products twice could be seen as a misuse of confidential information since he is confident Josh will buy the materials but is still willing to move forward with the Breeland quote without disclosing the possibility of Josh’s purchase to Tom.
George may also be engaging in a conflict of interest by using his brother and information gained in a non professional environment as a means to unethically increase revenue. It would also represent a departure from ethics and integrity as an activity that discredits the profession since it lacks communication with Breeland. If Josh does confirm he will purchase the materials within the 20 day usable product window, it would represent additional and more timely information and should signal Abby’s recommendation to revise Breeland’s quote, even if it is after the fact. It is a timing issue.
If George does provide the Breeland quote to Tom ‘as is’ and does not discuss with him the implications of his prospective new client on the numbers provided, he would be weakening his own credibility since it would represent a lack of information disclosure to Tom. It could be argued that he is providing the quote fairly and objectively but, it lacks the insight of how the new client would change the numbers in Breeland’s favor and precludes the possibility of client double billing, an important fact to support disclosure of all relevant information communicated fairly and objectively.
I think Abby is correct in advising George that a possible rework of the quote is in order although based on the confirmed information, the current Breeland bid should go forward as is with a caveat that it could change with the confirmation of Josh as a new client if he is engaged before the Breeland quote is signed. Since the meeting will take place between George and Tom on Wednesday and the details of Joshs’ possible purchase are expected to become known ‘later in the week’, it makes sense to wait a day or two before making the decision.
It is also possible that Josh may not make the purchase. Ace is one of the few companies’ nationally that is able to produce the product, it seemly unlikely that Ace would risk losing their business by asking for a few extra days to confirm final details of the quote. No mention of Josh’s possible order is necessary. Tom should be given full disclosure by George of the impact on profitability of both scenarios. These would include: 1). the order ‘as is’ without the prospect of Josh placing an order, 2). he revised order based on Abby’s recommendations of reducing XO-1600 materials cost, disposal cost and markup, and the additional sale of the remaining 10 gallons of XO-1600 to Josh, including shipping charges and 3). Two separate quotes that would include the original quote to Breeland executed as is, then a contract signed later with Josh followed up with a revised contract with Breeland eliminating the disposal cost and the additional materials cost. The quote o Josh should not include organization-sustaining costs since they are not considered product costs. Abby recommends that George inform Tom about the prospective use of the extra 10 gallons. If George is unwilling to do so, she should also be willing to speak directly with Tom about the Breeland quote changes, if applicable. It is not known what Ace’s policy is regarding resolving issues with questionable ethical implications. If necessary, Abby may contact an IMA Ethics Counselor to gain a better understanding of how she should proceed.
The case study suggests this issue is a matter of how a management accountant might proceed in light of a shortfall of required monthly profit goal, in that is may be perceived as a way to make up the shortage. It is also mentioned that neither profit scenario would provide the desired result of reaching the monthly goal. The management accountant should see this as an ethical issue and not a function of whether one scenario or the other will produce the desired result.
If Abby were to revise her original assumptions and excluded the organization-sustaining costs per required by the ABC method she is using, she would have noted a reduction in the bottom line of $18,000, which represents the disposal fee plus an 80% markup. Clearly, the scenario George likes would net the larger bottom line at $802,800, an increase of $28,800 in the bottom line of the Breeland Ltd order alone. This could be a potential lapse in judgment based on a desire to get closer to a proposed profit goal if he doesn’t discuss the possible purchase by Josh with Tom.
From a policy standpoint however, George is doing the correct thing, although from a fairness standpoint, Josh’s possible order must be considered. Three scenarios are included which outline how each quote will affect the bottom line. If the original quote is signed by Breeland and moves forward without a purchase by Josh, the bottom line will be increased by $774,000. If Josh is given time to confirm and execute an order with Ace for the 10 gallons of material prior to the Breeland quote signing, Ace bottom line will be reduced by $18,000.
If Breeland signs the quote, then later Josh signs a contract for the remaining materials and the materials are double billed, the company bottom line would be increased by $802,800. This is ultimately an issue with areas that need insight from IME ethical standards, especially with respect to communicating information to Tom Brennen. It seems a case in which company policy might be overlooked in order to maintain a standard of fairness while also being honest about product and customer treatment.
