Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed
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| 21.21 Just-in-time systems, ethics. (30 min) 1 Plant profitability in the first year after implementation and in subsequent years based on Eluard’s report will be as follows First year after implementation Subsequent years Annual expected benefits Lower investment in stocks Reductions in setup costs Reduction in costs of waste, spoilage and rework Higher revenues from responding faster to customers Total annual expected benefits Annual expected costs of JIT implementation Operating profit (loss) from JIT implementation €290,000 110,000 200,000 180,000 780,000 950,000 €(170,000) € 350,000 150,000 250,000 300,000 1,050,000 750,000 € 300,000 Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5 th Edition, Instructor’s Manual © Pearson Education Limited 2012 On the basis of Eluard’s report, it appears that Electro-Sons should implement JIT. It costs €170,000 in the first year but results in higher profits of €300,000 in subsequent years. In the long run, the benefits appear to clearly outweigh the costs. 2 Noailles is correct in characterising some of the financial benefits as soft. She is probably referring to operating income from higher revenues as a result of responding faster to customers. Higher profits from higher revenues are much harder to predict than cost savings. Cost savings are internal to the firm. The benefits from higher revenues depend on the reactions of customers and the responses of competitors. If the revenue benefits are not realised, losses in the first year after JIT implementation will increase to €350,000 (presently estimated loss of €170,000 plus €180,000). Furthermore, no net benefit will accrue in subsequent years currently estimated operating profit of €300,000 minus the €300,000 loss in operating profits if the soft revenue benefits are not realised. Without the revenue gains, JIT does not appear to be worthwhile. Students might also raise questions as to whether Eluard has correctly estimated the likely cost savings. For example, suppose setup costs include a labour component. Then, even if setups are performed more efficiently, setup cost savings may not occur if labour agreements make dismissal of workers difficult. 3 It is unfortunate that the first year of JIT implementation (when costs of JIT implementation are likely to exceed benefits) happens to coincide with Anna de Noailles’ last year with Electro-Sons. In this sense, it does appear that Noailles is being unfairly penalised if she implements JIT – she would bear the costs while the incoming manager would get the benefits. Noailles should indicate these circumstances to the senior management at Electro- Sons and see if she can renegotiate the terms. For example, she might ask senior management to evaluate her performance after adjusting for the decline in plant profitability resulting from implementing JIT. Asking Eluard to change the numbers to make the JIT programme look worse and to postpone implementation is, hence, unethical. Any attempt by Eluard to use alternative numbers to manipulate the benefits from JIT implementation is unethical because it violates the Standards of Ethical Conduct for Management Accountants. The competence standard is violated because of failure to comply with technical standards and lack of appropriate analysis. The integrity standard is violated because it subverts the attainment of an organisation’s objectives and discredits the profession. The objectivity standard is violated because of the failure to communicate information fully and fairly. The Standards of Ethical Conduct for Management Accountants describes the steps that Eluard should take to resolve the ethical conflict. • If Eluard is certain that her numbers are correct, she should inform Noailles of this. • If Noailles continues to pressure her, Eluard should present the situation to the next higher level of manufacturing, the vice-president, for resolution. • If Eluard does not receive a satisfactory response, she should continue to approach successive higher levels, including the Audit Committee and the Board of Directors. Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5 th Edition, Instructor’s Manual © Pearson Education Limited 2012 • Eluard should clarify the concepts of the issue at hand in a confidential discussion with an objective adviser, that is, a peer. • If the situation is still unresolved after exhausting all levels of internal review, Eluard will have no recourse but to resign and submit an informative memorandum to an appropriate representative of the organisation. Unless legally bound (which does not appear to be the casein this situation, it is inappropriate to have communication about this situation with authorities and individuals not employed or engaged by the organisation. Download 1.72 Mb. Share with your friends:
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