Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed
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- Cost (3) Percentage of sales (4) = (3) ÷ €80,000,000
- Objectivity
| 20.21 Ethics and quality. (30–35 min) Sales 2012 €90,000,000 2011 €80,000,000 Costs of quality Cost (1) Percentage of sales (2) = (1) ÷ €90,000,000 Cost (3) Percentage of sales (4) = (3) ÷ €80,000,000 Prevention costs Design engineering Appraisal costs Online inspection Product testing Total appraisal costs Internal failure costs Scrap External failure costs Warranty liability Total costs of quality €1,800,000 700,000 2,000,000 2,700,000 2,160,000 2,250,000 €8,910,000 2.0% 3.0% 2.4% 2.5% 9.9% €800,000 600,000 1,000,000 1,600,000 2,000,000 3,600,000 €8,000,000 1.0% 2.0% 2.5% 4.5% 10.0% 2 Kiruna has made the correct shift in quality management by investing more in prevention and appraisal while reducing external failure costs. However, it still needs to reduce costs in all costs of quality categories by becoming more efficient in its prevention and appraisal activities and more effective in implementing these programmes to reduce failure costs. 3 Incorrect reporting of the costs of quality and various non-financial measures of quality with the goal of winning various quality awards is unethical. In assessing the situation, some elements of Ethical Guidelines that the management accountant could consider are listed below. Competence Clear reports using relevant and reliable information should be prepared. Preparing reports on the basis of incorrect costs of quality numbers in order to make the company’s quality performance look better than it is violates competence standards. It is unethical for Törnman to suggest that Lantto change the costs of quality and non-financial measures of quality numbers in order to make the plant’s performance look good. Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5 th Edition, Instructor’s Manual © Pearson Education Limited 2012 Integrity The management accountant has a responsibility to avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict. Törnman’s motivation for wanting Lantto to revise the quality figures could well have been motivated by Törnman’s desire to please the plant manager. This action could be viewed as violating the responsibility for integrity. The Standards of Ethical Conduct require the management accountant to communicate unfavourable as well as favourable information. In this regard both Törnman’s and Lantto’s behaviour (if Lantto agrees to modify the costs of quality numbers) could be viewed as unethical. Objectivity The management accountant’s standards of ethical conduct require that information should be fairly and objectively communicated and that all relevant information should be disclosed. From a management accountant’s standpoint, adjusting the quality numbers to make quality performance look good would violate the standard of objectivity. For the various reasons cited above, we should take the position that Törnman’s and Lantto’s behaviour (if Lantto goes along with Törnman’s wishes) is unethical. Lantto should indicate to Törnman that the costs of quality and non-financial measures of quality presented in the reports are indeed appropriate. If Törnman still insists on modifying the quality numbers and reporting better quality figures, Lantto should raise the matter with one of Törnman’s superiors, other than Töyrä, who happens to have a vested interest in this dispute. If, after taking all these steps, there is continued pressure to overstate quality performance, Lantto should consider resigning from the company, and not engage in unethical behaviour. |