Hi I need help with this Question (attached) : -What are the consequences and it
ID: 2568405 • Letter: H
Question
Hi I need help with this Question (attached) :
-What are the consequences and its effects on others:
a. What parties (stakeholders) may be harmed or benefited?
b. Whose rights or claims may be violated?
c. Which specific interests are in conflict?.
"Consider your obligations and responsibilities to the various stakeholders. What is the effect of each alternative on the various stakeholders? Which stakeholders are harmed or benefited most?
Make a decision that is fair and ethical to those affected."
A Division of the Company uses absorption costing for profit reporting. The general manager of the Division is concerned about meeting the income objectives of the division. At the beginning of the reporting period the division had an adequate supply of inventory. The general manager has decided to increase production of goods in the plant in order to allocate fixed manufacturing cost over a greater number of units. Unfortunately, the increased production cannot be sold and will increase the inventory. However, the impact on earnings will be positive because the lower cost per unit will be matched against sales. The general manager has come to you, the controller, to determine exactly how much additional production is required in order to increase net income enough to meet the division's profit objectives. You analyze the data and determine that the inventory will need to be increased by 40% in order to absorb enough fixed costs and meet the income objective; however, you also determine the increased inventory cannot be sold given existing demand. Prepare your report regarding your decision to the division managerExplanation / Answer
The manager to meet the profit objectives of the division is inclined to increase the production. By doing so the manager is transferring the production cost of the present period to the next period through Ending inventory of finished goods.
As it is discovered that the increased inventory is so much that could not be sold given existing demand. The effort of the increase in the output will increase the inventory damages and repair costs. This will reduce the profit of the upcoming years.
a. Parties harmed / benefited : The shareholders and the employees whose stake is well attached to the profits of the company. The supplies and creditors payments and bank’s principle and interest payments, got struck if the inventories could not be sold.
b. Rights and Claims violation : The dividend to the shareholders got reduced. The payments to the suppliers got affected.
c. Specific interests : The specific interests of the shareholders, suppliers & creditors and the Fund providers, are in conflicts with each other because shortage of the profits and cash.
So, the managers attempt to fulfill the objective of the company’s income through increasing the inventory level is totally unfair and unethical towards the stakeholders like shareholders, employees, suppliers and fund providers/banks.
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