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Molly McDale is the Controller for Roberts Manufacturing. It is a small company that manufactures plastic lumber and is run by the owner and CEO, Frank Roberts. At the end of the year, Roberts is reviewing the projected operating income for the company for the year. He tells McDale that the projected operating income is too low; if operating income is not at least $200,000, no holiday bonuses will be paid to employees, including McDale.

Hoping to find an error, McDale rechecks the projected financial statements; she finds no errors. Since cost of goods sold is a large portion of Roberts expenses, she next analyzes the components of cost of goods sold. The amount of direct material used ties directly to the physical inventory count, so there are no errors there. The direct labor dollars also tie directly to the payroll reports, eliminating another potential source of errors. She then looks at the way manufacturing overhead has been allocated to products.

Traditionally, manufacturing overhead has been allocated to products based on direct labor hours because the manufacturing process for plastic lumber is labor intensive. McDale calculates manufacturing overhead based on machine hours used and finds that cost of goods sold will be $55,000 lower if manufacturing overhead is allocated based on machine hours rather than direct labor hours. The $55,000 difference, if booked, would cause net income to be $212,000, which means that bonuses would be paid to all employees. McDale knows that several factory employees are struggling and the holiday bonus would be much appreciated. In addition, McDale herself feels that she has earned the bonus over the past year because she has helped to implement several cost savings programs and has worked many long days without overtime pay.

Requirements: Study the IMA Statement of Ethical Professional Practice (link in blackboard) and answer the following:

1. Discuss the significance of ethics in managerial accounting. Why is it important? Structure your response in terms of the principles (not the standards) that managerial accountants agree to uphold as stated in the IMA Statement of Ethical Professional Practice; be sure to include all four principles.

2. What is/are the ethical issue(s) in this situation, assuming McDale were to change the overhead calculation, when considering the IMA ethical standards (do not confuse these with the principles)? List the standards and explain how the standard was violated if you believe that to be the case; if you do not feel the standard was violated, note that it is not applicable and support your answer with a brief justification.

3. Who are the stakeholders that are affected by McDales actions? Be specific and indicate how they are impacted (positively and/or negatively) and why.

4. What specific steps should McDale take to resolve the situation? Discuss whether your suggested steps follow the IMA ethical framework and guidelines (see Resolution of Ethical Conflict section of IMA Statement of Ethical Professional Practice).

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