Ace Fertilizer Company
Transcription
Ace Fertilizer Company
ACE FERTILIZER COMPANY: ETHICAL COST ALLOCATIONS AND PRICE DETERMINATION Presented By: Brittany Chumbley D.J. Gastador Don Muller Tyler Patton Industry Report • Nitrogen(N), phosphorous(P) and potassium(K) are the three primary components of fertilizer. • Top three fertilizer-utilizing U.S. crops: corn, wheat, soybeans. • Top five fertilizer-consuming states: Illinois, Iowa, Ohio, Texas, Indiana. • The fertilizer manufacturing industry is responsible for approximately 33,000 jobs in the United States. • Fertilizer production facilities are located in 34 states. • The U.S. nitrogen fertilizer industry operates production plants in 27 states, the phosphate fertilizer industry operates production plants in 12 states and potash is mined in Michigan, New Mexico and Utah. • The United States is the second largest producer and consumer of fertilizer in the world. China is the first in both categories. • Research shows that fertilizers account for at least one-third of all crop yields in the world. • The fertilizer industry has annual revenue of approximately $10 billion. pulse.pharmacy.arizona.edu Facts • Abby Conroy (Assistant Director) – Abby is responsible for the design, bidding, manufacture, and ultimate delivery of special order to customers. Abby develops and completes all special order contracts. • George Smilee (Director of Manufacturing) – George initials his approval of the contracts and forward them to the chief operating officer. • Tom Brennen (Chief Operating Officer) – Tom gives final approval. • Special order, unless specific authorization is obtained from Tom himself, must be billed at 80 percent over the cost of the order. • Abby could allocate indirect costs to special orders using activity-based costing. Rather than simply allocating indirect costs among special orders using a companywide rate, ABC acknowledges that not all costs are driven by output volume. • Breeland Ltd. requests a special order needing a cleaning solvent that needs 40 gallons of XO-1600. This substance only comes in 50-gallon drums. • XO-1600 has a shelf life of only 20 days once the drum is opened. After 20 days, the substance becomes unstable and must be discarded. The price of discarding the substance is $10,000. • No other orders exist for XO-1600. Furthermore, Breeland Ltd. is not interested in taking possession of the unused gallons. Facts • • • • • • • • • • • • • • Direct materials: Non-XO-1600 XO-1600: Purchase cost Disposal cost Direct labor Unit-level activity cost ($40 * 4,000 gallons) Batch-level activity cost ($5,000 * 4 batches) Product-level activity cost Customer-level activity cost Organization-sustaining level activity cost (20,000+80,000+10,000+30,000+160,000+20,000 Total costs of Breeland Ltd. special order Markup on cost ($750,000/.80) Total Price Determination for Breeland Ltd. Order $ 20,000 80,000 10,000 30,000 160,000 20,000 80,000 30,000 320,000 $ 750,000 900,000 $1,650,000 Facts • George Smilee discovers his brother, Josh, would be willing to purchase the remaining 10 gallons of XO-1600. • Abby suggests that the price quote for Breeland Ltd. be delayed in order to revise it due to Josh purchasing the unused gallons. However, George is against this delay. • George wants to bill the 10 gallons of XO-1600 twice while the disposal costs would not be incurred. This event adds $93,600 ($16,000 for the 10 gallons of XO-1600, $10,000 of eliminated disposal costs, and $41,600 for markup on the cost of the 10 gallons of XO-1600) to the company’s bottom line. • If they do not do this, they would not meet their monthly profit goal. Question # 1 Did Abby compute the cost of the Breeland Ltd. special order correctly before the weekend get-together? If not, how was her cost estimate and/or price determination flawed? Answer • No, Abby did not compute the cost directly. She divided the 80% markup instead of multiplying the costs then adding them. Question # 2 Whose assessment of the costing of this special order do you believe is correct – George Smilee’s or Abby Conroy’s? That is, should George’s conversations with Josh impact Abby’s cost estimate of the Breeland Ltd. special order? Answer • Abby’s assessment for the cost of the special order is correct. Company policy mentions that the full costs should be billed, unless there is an order for any materials that go unused. George believes that Breeland Ltd. should still be billed the costs incurred with the 10 unused gallons. He wants to charge them for the disposal of the substance when it would not be disposed of. If the order Josh makes is finalized, then these extra charges are not necessary. Question # 3 Are there any ethical issues related to the cost determination on the Breeland Ltd. special order? If so, what issues are present? How should Abby resolve these conflicts? Should Abby go directly to Tom Brennen about this new development? How can Abby use the IMA Statement of Ethical Professional Practice as a guide for her actions? Answer • Ultimately, it is George’s responsibility to disclose the information. It would be unethical for him to withhold this information from approval by Tom. Abby’s decision to revise the order is ethical. She does not want to bill Breeland Ltd. charges that they have not incurred. According to the IMA guide, Abby should contact Tom and disclose this information to him. This information is important to Tom because it aids him in finalizing the approval on the orders. Question # 4 If Abby were to modify her original cost estimate of the Breeland Ltd. special order to include Josh’s purchase of the remaining 10 gallons of XO-1600, what price determination would she have arrived at? What impact would that have had on Ace Fertilizer’s bottom line? Answer • • • • • • • • • • • • • • • • • The adjusted price would be as follows: Direct materials: Non-XO-1600 XO-1600: Purchase cost (80,000 x 40/50) Disposal cost Direct labor Unit-level activity cost ($40 * 4,000 gallons) Batch-level activity cost ($5,000 * 4 batches) Product-level activity cost Customer-level activity cost Organization-sustaining level activity cost (20,000+64,000+0+30,000+160,000+20,000 Total costs of Breeland Ltd. special order Markup on cost ($698,000*.8) Total Price Determination for Breeland Ltd. Order The total price would be reduced by $393,600 (1,650,000 - 1,256,400). $ 20,000 64,000 0 30,000 160,000 20,000 80,000 30,000 294,000 $ 698,000 558,400 $1,256,400 Additional Issues • The company should look into not being so family oriented in order to avoid these types of situations in the future. • The company should look into implementing more internal controls and having more than one person approving an order. Conclusions and Recomendations A recommendation for Abby would be to disclose the information to Tom. The information that George is withholding may affect the decision on whether or not Tom approves the order or not. It would be unethical for Abby to also withhold this information from Tom. Another recommendation would be to put the employees through ethical training in order to avoid these types of conflicts in the future. Furthermore, personal relationships with coworkers outside of work should be avoided. This would help stop the pressure that employees like Abby have to face from higher ups. Creating a committee to verify the information on all order would also help the company. This would help with all information being disclosed. Furthermore, it would allow the information that managers receive to be accurate.