What should be their role in the given matter

Assignment Help Management Theories

Reference no: EM131379684

Cleveland Custom Cabinets is a specialty cabinet manufacturer for high-end homes in the Cleveland Heights and Shaker Heights areas. The company manufactures cabinets built to the specifications of homeowners and employs 125 custom cabinetmakers and installers. There are 30 administrative and sales staff members working for the company. James Leroy owns Cleveland Custom Cabinets. His accounting manager is Marcus Sims. Sims manages 15 accountants. The staff is responsible for keeping track of manufacturing costs by job and preparing internal and external financial reports. The internal reports are used by management for decision making. The external reports are used to support bank loan applications.

The company applies overhead to jobs based on direct labor hours. For 2014, it estimated total overhead to be $9.6 million and 80,000 direct labor hours. The cost of direct materials used during the first quarter of the year is $600,000, and direct labor cost is $400,000 (based on 20,000 hours worked). The company's accounting system is old and does not provide actual overhead information until about four weeks after the close of a quarter. As a result, the applied overhead amount is used for quarterly reports.

On April 10, 2014, Leroy came into Sims's office to pick up the quarterly report. He looked at it aghast. Leroy had planned to take the statements to the bank the next day and meet with the vice president to discuss a $1 million expansion loan. He knew the bank would be reluctant to grant the loan based on the income numbers in Exhibit 1 .

EXHIBIT 1
CLEVELAND CUSTOM CABINETS Net income for the quarter Ended March 31, 2014
Sales	$6,400,000
Cost of goods sold	4,800,000
Gross margin	$1,600,000
Selling and administrative expenses	1,510,000
Net Income	$90,000

Leroy asked Sims to explain how net income could have gone from 14.2 percent of sales for the year ended December 31, 2013, to 1.4 percent for March 31, 2014. Sims pointed out that the estimated overhead cost had doubled for 2014 compared to the actual cost for 2013. He explained to Leroy that rent had doubled and the cost of utilities skyrocketed. In addition, the custom-making machinery was wearing out more rapidly, so the company's repair and maintenance costs also doubled from 2013. Leroy understood but wouldn't accept Sims's explanation. Instead, he told Sims that as the sole owner of the company, there was no reason not to "tweak" the numbers on a one-time basis. "I own the board of directors, so no worries there. Listen, this is a one-time deal. I won't ask you to do it again," Leroy stated. Sims started to soften and asked Leroy just how he expected the tweaking to happen. Leroy flinched, held up his hands, and said, "I'll leave the creative accounting to you.

Questions
1. Do you agree with Leroy's statement that it doesn't matter what the numbers look like because he is the sole owner? Even if it is true that Sims "owns" the board of directors, what should be their role in this matter?

2. a. Assume that Sims is a CPA and holds the CMA. What are the ethical considerations for him in deciding whether to tweak the numbers? What should Sims do and why?

b. Assume that Sims did a utilitarian analysis to help decide what to do. Evaluate the harms and benefits of alternative courses of action.

3. Assume that Sims decided to reduce the estimated overhead for the year by 50 percent. How would that change the net income for the quarter? What would it be as a percentage of sales? Do you think Leroy would like the result? Do you think he will be content with the tweaking occurring just this one time, or will he be tempted to do it again in the future?

Reference no: EM131379684

Questions Cloud

Explore the business-level strategies for the corporation : Analyze the business-level strategies for the corporation you chose to determine the business-level strategy you think is most important to the long-term success of firm and whether or not you judge this to be a good choice.

What percent of all twin births were preterm : Create an appropriate graph comparing the outcomes of these pregnancies by the level of medical care the mother received.

Identify what daniels should do in given situation : What should an employee do when he or she discovers that there is an error in a projection? Why do you suggest that action?

How did the united state reconcile this view with annexation : The United States prides itself on support of democracy and the protection of human rights. How did the United States reconcile this view with the annexation of foreign territories during the late nineteenth and early twentieth centuries? Suppor..

What should be their role in the given matter : Do you agree with Leroy's statement that it doesn't matter what the numbers look like because he is the sole owner? Even if it is true that Sims "owns" the board of directors, what should be their role in this matter?

Find the marginal distribution of blood pressure level : Write a brief description of the association between age and blood pressure among these employees.

Can the us defeat taliban insurgency in the afghanistan : Argue whether or not the U.S. government reacted appropriately after the September 11, 2001 terrorist attacks. Were measures such as the USA PATRIOT Act an overreaction and a blow to civil liberties or not? Has the expansion of domestic intelligen..

Which of the following qualitative research designs : Carl Compost has been living and working on a communal organic farm for the past six months. He wants to understand the political, environmental, and social perspectives shared by the members of the commune. Dr. Compost is probably employing which..

Do these data prove that lack of exercise causes obesity : Use graphical displays to show different percentages of physical activities for the three BMI groups.

User Account

All Pages