Professional Ethics

Learning Objective 7: Understand what professional ethics mean to management accountants

After really big ethical fuck ups by the likes of big companies like Enron, Lehman Brothers, Toshiba, and many more, ethical conduct in accounting is more important than ever. When ethics fail, entire markets can fail.

Institutional Support

Because accountants are accountable both in and out of the company for financials, they have special obligations. The Sarbanes-Oxley Act exists as a means of putting these obligations into law. They impose tough standards and criminal punishments for anyone who doesn't meet those standards. It also opens a door for whistleblowers.

Under the Sarbanes-Oxley Act, CEOs and CFOs must prove their financial statements as legitimate, usually through outside auditing. For this reason, the Act empowers the audit committee of any company's board to hire, compensate, and fire public accounting firms to audit the company. As a counterbalance to this, the Act also limits the services an public accounting firm can give to a company they are auditing to reduce dependency. These audits and auditors are in turn audited by the Public Company Accounting Oversight Board. What this means is that companies are easily audited by independent public accounting firms while these same accounting firms are diversified and held under strict scrutiny to avoid any funny business.

Accountants also find institutional support from Professional Accounting Organizations, who represent management accountants. These organizations certify that these accountants have the technical knowhow and expertise, as well as advocate high ethical standards. In the United States, these are instead actual ethical guidelines. The Institute of Management Accountants (IMA) provides guidance on this front, and even has an ethics hotline for Accountants to walk through any ethical dilemma.

Statement of Ethical Professional Practice

https://quizlet.com/464550048/statement-of-ethical-professional-practice-flash-cards/

Resolution of Ethical Conduct

When faced with ethical issues, follow established policies to resolve the problem. If they don't work, then:

1. Discuss with immediate supervisor, unless they are involved already (in which case, keep going up levels). If you get to the CEO or equivalent, you can go to a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contacting above superiors should be done with superior's knowledge (if she is not involved with the initial problem). Communicating outside the organization is not appropriate, unless there is a violation of law.
2. Talk confidentially with an IMA Ethics Counselor or impartial advisor to clarify ethical issues.
3. Consult attorney regarding legalities

What are the ethical responsibilities of management accountants?

Management Accountants are responsible to many both in and out of the organization. For this reason, it is important for them to emphasize high standards in Competence, Integrity, Confidentiality, and Credibility. Laws like the Sarbanes-Oxley Act, as well as many outside ethical advisory groups and organization exist to help support Accountants in deriving solutions to ethical problems

Hybrid Costing Systems

Learning Objective 6: Understand the need for hybrid-costing systems such as operation costing

Overview of Operation-Costing Systems

ARE 140 Farm Management February 6 Lecture: Obtaining and Using Credit

Credit: What and Why?

Credit is the ability to borrow money. Creditors are particularly interested in your ability to pay it back.

Leverage - Jumpstarts starting point for business. Eat credit interest for higher return from business.

Credit: How and When?

Provide proof you can pay it back, this being in past records and plans to make more money with the loan.

Single parent or lump sum

Lines of credit - Provide big money account. Charge interest whenever you withdraw money, often reward putting money back in

Amortized loans - Kill over time

Balloon payment loans - Pay interest for first few years, pay whole thing at the end

Common costs of borrowing

Interest: Simple or compound

Points: Fee for getting loan

Appraisal fees 

Administrative fees

Rates may be fixed or variable

How to compare offers of credit?

Translate payments into PV.

Other means of sourcing capitol

• Leasing - Temporary possession of property
• Outside equity from investors
• Contracts

Equity Investors:

Entrepreneur provides idea and likely management services, and the equity investor proves the money capital.

Investor is likely to have the upper hand in valuing ownership.

Contracts:

Forward contracts: Pay now for service later (lock in price of grain for next year)

Crowdsourcing

Slow Money

Borrowing places demands on the borrower

The assumption made is that the borrower will make more money than the interest of the money they borrowed. 

Transferred-In Costs in Process Costing

Learning Objective 5: Apply process-costing methods to situations with transferred-in costs

They're basically the same as Direct Materials and Conversion Costs, but their own category.

Case 3: Process Costing with Some Beginning and Some Ending Work-in-Process Inventory

Learning Objective 4: Use the weighted-average method and the first-in, first-out (FIFO) method of process costing

Weighted-Average Method

Combine the beginning inventory with work started this period.

1. Physical Units: Add up Beginning WIP with Work Started this Period. It should match Units completed and transferred out + Ending WIP (225+175=400+100)
2. Equivalent Units: Convert WIP accounts to Equivalent Units and add to their respective start and completed Units, these should equal each other. (For expediency, you only need to calculate Completed+Ending WIP)
3. Total Costs: Add up Beginning WIP Costs and Costs added during period
4. Cost/Equivalent Unit: It's just math
5. Allocate Costs: Where'd it go between completed and ending WIP

First-In, First-Out Method

I, look I know what FIFO is.

1. Physical Units: Beginning WIP -> Completed and Transferred first. The difference must be units started during this period that are Completed and Transferred. Any units started this period that aren't Completed and Transferred should end up in Ending WIP.
2. Equivalent Units: Note, Equivalent Units of work done this period. This means if Beginning WIP inventory is [100% | 30%], the Equivalent Units of work done this period is [0% | 70%]. Ending WIP is more of the same.
3. Total Costs: Duh
4. Cost/Equivalent Unit: Also Duh
5. Allocate Costs: Allocate to Work Done this period to your Beginning Inventory, then Work Started and Completed, then Ending Inventory.

Two Things to note: 

FIFO should look mostly the same as Weighted Average except that it shifts the Cost of Goods Completed and Transferred Out with the Ending WIP. This is because Costs from the Beginning WIP first go through Completed and Transferred Out before Ending WIP (if they even get there). Compare this to Weighted Average, which distributes that cost proportionally between Transferred out and Ending WIP.

FIFO mostly applies only to items being transferred out. While it is possible to apply FIFO to units coming in as well, matching both up is cumbersome and is generally avoided.

Comparing the Weighted-Average and FIFO Methods

It should be noted that Weighted-Average and FIFO only really differentiate if the cost of inputs fluctuate by a significant amount, or if the Ending WIP to Products Completed and Transferred ratio is particularly high.

If Inputs drop, this causes FIFO to carry these higher costs into what eventually will be CoGS. If Inputs increase, Weighted-Average will do this. The higher CoGS will make the income of the company look smaller (even though the actual money they make is the same either way). This helps avoid taxes. On the other hand, going the opposite route for a lower CoGS may make a manager look better in the short term, though it does end up getting taxed more.

What are the Weighted-Average and FIFO methods of process costing? Under what conditions will they yield different levels of Operating Income?

Weighted Average and FIFO are different ways of allocating Process Costs onto the products created. Weighted Average simply distributes leftover costs from the previous month into the next, while FIFO gets those previous costs out of the door first.

They're mostly the same until Costs fluctuate and if Ending Inventory is significantly large, at which point FIFO makes costs look bigger if costs are falling and vice versa.

Try It! 17-3

Consider Stanton Processing Company Again. With the same information for 2017 as provided in Try It! 17-2, redo the problem assuming Stanton uses FIFO costing instead.

March 1   (3000 Units) [40%|10%]
March 31 (2000 Units) [80%|40%]

The company completed 30,000 units during March. Manufacturing costs incurred during March were direct materials costs of $176,320 and conversion costs of $312,625. Inventory at March 1 was carried at a cost of $16,155 (direct materials, $5,380 and conversion costs, $10,775).

Physical Units:
The 3,000 Units in the Beginning WIP Inventory are Completed and Transferred Out
27,000 Units Started this month are Completed and Transferred Out
2,000 Units Started this month end up incomplete and in the WIP Inventory

Equivalent Units:
From the Beginning WIP Inventory, the Equivalent Units of work that needs to be done is:
3,000 Units [60%|90%]
[1,800 | 2,700]
Units Started and Completed this month:
27,000 Units [100%|100%]
[27,000 | 27,000]
Units Started and end up in Ending WIP:
2,000 Units [80%|40%]
[1,600 | 800]
Total:
[30,400 | 30,500]

Total Costs:
Started: [$176,000 | $312,625]
WIP:     [    $5,380 |   $10,775]
Total:    [$181,380 | $323,400]

Cost/Equivalent Units:
[$5.97 | $10.60]

Allocate Costs
Finish WIP: [$10,746 | $28,620]
Started and Completed: [$161,190 | $286,200]
Started and WIP: [$9,552 | $8,480]

Try It! 17-2

The Stanton Processing COmpany had work in process at the beginning and end of March 2017 in its Painting Department as follows:

March 1   (3000 Units) [40%|10%]
March 31 (2000 Units) [80%|40%]

The company completed 30,000 units during March. Manufacturing costs incurred during March were direct materials costs of $176,320 and conversion costs of $312,625. Inventory at March 1 was carried at a cost of $16,155 (direct materials, $5,380 and conversion costs, $10,775).

Assuming Stanton uses weighted-average costing, determine the equivalent units of work done in March, and calculate the cost of units completed and the cost of units in ending inventory.

Physical Units:
3,000 Beginning
X Started
30,000 Completed
2,000 Ending

X=29,000 Started

Equivalent Units:

30,000 [100%|100%]
  2,000 [80%  |  40%]
[31,600 | 30,800]

Total Costs:
Started: [$176,000 | $312,625]
WIP:     [    $5,380 |   $10,775]
Total:    [$181,380 | $323,400]

Total Cost/Equivalent Units:
[$181,380 | $323,400] / [31,600 | 30,800]
[$5.74 | $10.50]

Allocate Costs:
30,000 [30,000 | 30,000]
  2,000 [  1,600 |      800]
30,000 [$172,200 | $315,000]
  2,000 [    $9,184 |     $8,400] (minor rounding error in allocated WIP Direct Materials)