IMA Standards, Ethics, & Pricing Strategies

Dimple Patel
05/04/2017

IMA Standards

The Institute of Management Accountants upholds a respectable level of professionalism

in the industry by promoting four umbrella termed standards: competency, credibility, integrity,
and confidentiality. The scope of these four values specifically applies to internal (not external)
auditors.

In terms of competence, accountants are expected to maintain and grow a professional

level of industry knowledge to better serve their clients. Accountants should be versed in current
legislations and rules. Any of the accountants recommendations should be both understandable
and timely as elements of accountancy can be esoteric for clients of non-technical industries.
Also, accountants should be aware and openly communicative about their own limitations in
terms of providing opinions on clientele cases. Breaking the IMAs standard could entail an
accountant stepping outside of their knowledge zone when advising a client; for example, a CPA
could incorrectly advise his retired client to gift his IRA as a contribution to a local charity such
that the IRA is exclude from taxable income, but if said client does not meet the states age
requirements for qualifying the IRA distribution as nontaxable, then the accountant violated the
competency standard and could open themselves up to malpractice allegations.

The second IMA standard encompasses the fragile notion of confidentiality. Accountants
must maintain all clientele information as confident unless expressly authorized to release said
information to a third party by the client, which entails another stipulation in the standard
requiring full disclosure of any potential use of said information. Moreover, in the case of
partnerships and firms, senior accountants must make certain that their junior staff are maintain
professional standards of confidentiality for their accounts. Perhaps most importantly,
accountants must not employ clientele information for illegal or unethical (as vague as this can
be) reasons. Back in 2014, a former French auditor for PWC, Antoine Deltour, leaked classified
information regarding aptly named sweetheart tax deals that global corporations made in
Luxembourg. Companies like PepsiCo and Disney World were hit with bad press because of
Deltours release of confidential information.

Accountants must also adhere to the integrity standard; in particular, accountants must be
mindful of any likely sources of conflicts of interest and should appropriately communicate such
potential problems to all relevant clients. Really, the crux of this standard lies in avoidance of
unlawful activities or unethical behaviors. For example, an accountant can mislead their client
into taking an illegal tax deduction in order to garner more profits for their own firm; such a
tactic clearly violates the integrity of the practice by misleading the client into potential fines and
higher future tax payments.
 IMAs final standard espouses credibility. Credible accountants deliver information to
their clients timely and accurately. Moreover, they make certain that the said information is
relevant to the case and firms opinion. Accountants should always be forthcoming about any
gaps or deficiencies in the cases information. For instance, accountant who fails to disclose a
recent tax rate change to their clients would violate the integrity standard as their information
was not trustworthy.

Supervisor-Employee Dynamics and Ethics

Knowledge of a companys internal hierarchy is integral in solving a sticky ethical

situation involving ones supervisor. Protocol usually calls for reporting such instances to ones
supervisor as it were, but the employee should disclose relevant information to the management
level one step higher up than the supervisor. This process should be repeated until a thorough
solution to the problem is reached. In the case that the said supervisor is an executive of the
company, the employee should go to the board of directors for help, and in some instances,
referral to national accounting boards may be necessary.
Hypothetical Firms Plan of Action based on Fixed and Variable Production Costs

Consider the following information, prepared based on a monthly capacity of 100,000 units:

Category Cost per Unit

Variable manufacturing costs $40
Fixed manufacturing costs $8
Variable selling costs $10
Fixed selling costs $6

Capacity cannot be added in the month and the firm currently sells the product for $75 per unit.

a) The company is currently producing 90,000 units per month. A potential customer has
contacted the firm and offered to purchase 8,000 units this month only. The customer is willing
to pay $52 per unit. Since the potential customer approached the firm, there will be no variable
selling costs incurred. Should the company accept the special order?

The following are calculations for the companys variable selling + manufacturing costs and
fixed selling + manufacturing costs at full capacity.

Entity Amount
Capacity in Units 100,000
Selling price per Unit $ 75
Variable Costs
Variable Manufacturing Cost $ 40
Variable Selling Cost $ 10
Total variable Cost per Unit $ 50
Contribution Margin per unit $ 25
Contribution Margin Ratio 33.33%
Fixed Costs
Fixed Manufacturing costs $ 800,000
Fixed Selling Costs $ 600,000
Total Fixed Costs $ 1,400,000
 Below is the information in regard to the effects of the special order on the entities such
as specific variable costs and contribution margin.

Entity Amount
Special Offer to purchase units 8,000
Selling Price $ 52
Variable costs
Variable Manufacturing Cost $ 40
Contribution Margin per unit $ 12
Additional Contribution Margin $ 96,000

The companys maximum production capacity is 100,000 units per month, which was
decreased to 90,000 units this month. Therefore, the companys is at 10,000 units below
maximum production capacity. In terms of adding strain to the company employees and
equipment, the "special order" would not burden the company unnecessarily as it's merely
fulfilling the unused production capacity (with still a 2,000-unit deficit). Moreover, even though
the special order is priced below the selling price of the unit, the order's contribution margin
warrants its completion. Because the client approached the company, unneeded variable selling
costs were eliminated; therefore, the resulting contribution margin, which measures the amount
of profit a product can contribute to the bottom line by subtracting the product's costs from its
selling price, would add $96,000 to the companys existing profits. In sum, the company should
accept the special offer.

b) Assume the same facts as in part a, except that the company is producing 100,000 units
per month. Should the company accept the special order?

There is not enough information to solve this hypothetical situation accurately. Lets
assume that there are no variable selling costs incurred as the client approached the company
first. Therefore, the only other costs that the special order would incur include variable
manufacturing cost, fixed manufacturing cost, and fixed selling cost. Variable manufacturing cost
remains the same no matter whether the company is at full production capacity or below
maximum production capacity. If the additional fixed manufacturing and selling costs fall below
the contribution margin of $96,000, then the company should accept the special order; however,
if the additional fixed costs exceed the contribution margin, then the company should reject the
special order. Fixed costs cannot be determined as there was no explicit determination of the
fixed costs and their relation to the amount of production (which, rightly so, seems like it would
be a variable cost problem, but the problem doesnt explicate whether fixed costs are maintained
or changed at every level higher than maximum production capacity).

c) List and describe other factors (not those addressed in parts a and b) that should be taken into
consideration when deciding whether to accept a special order?
 Other potential factors that could weigh in on the production of the special order can
relate to the companys more moralizing values. For instance, if the companys employees are
uncomfortable or are unwilling to take on the special load at subpar, par, or above-par
production, then the executives should determine whether the special orders additional
contribution margin warrants such effects on their employees. The companys morale and culture
should be gauged in that type of situation. Also, if temporary or seasonal workers can respond to
the special order in a prompt manner without hurting the existing employee rapport, then the
company should find no reason to hesitate in the extra production. Another possible factor could
be the identifying principles of the client themselves; for instance, if a defense equipment
companys special order came from their star clients opposition, then the company should think
twice before blindly engaging in the profitable activity.

Target Pricing Model

At its core, target pricing is the purposeful price manipulation of a product to meet the
customers expectations of the product price, the amount which most customers would willingly
pay to acquire said product. This pricing strategy becomes useful in highly competitive industries
in which other companies are achieving lower selling prices (because of decreased production
costs). Moreover, target pricing would ensure some degree of selling stability as some products
that are priced outside this strategy may fail once introduced in the market. Some products may
be temporary or seasonable and cannot afford to procure profits at anything other than the target
costing price. Lastly, with the introduction of wide-spread technology, customers are more price-
savvy than ever and expect more features and value from their products at lower costs, a painful
realization that companies must come to terms with by employing target costing.

Cost-Plus Pricing Model

Essentially, cost-plus pricing involves selling a product a specific markup above full unit
cost for said product. For example, if a restaurant wants to engage in this pricing strategy in
selling its hamburgers that are made at cost for $4 with a 50% markup, then the restaurant would
list the entre at exactly $6 on its menu. These markups are hardly arbitrary; usually, the
company has its long-term financial goals in mind when calculating these specific markup
numbers. Specifically, a company might be aiming for a target rate of return on investment,
which essentially means they must price each of their products to yield an X amount of dollars
per Y amount of the companys investment dollars. The target rate of return is the targeted annual
operating income divided by the amount of invested capital. For instance, if the German
chocolate company Milka made a zealous New Years resolution to achieve an annual operating
income of 600 billion off total investment capital of 6 trillion, then Milkas target rate of return
of investment would be 10%. If Milka is catering to some European giants and decides to only
produce two humongous Chocolate bars for the entire year, then Milkas target operating income
per unit would be 300 billion. Suppose that each chocolate bars full unit cost was 600 billion,
then the unit markup would be 50% of its cost to achieve the selling price of 900 billion for
each chocolate candy bar.
 This pricing strategys shortcoming may stem from when the companys overall financial
goals eclipses specific consumer expectations in terms of product pricing. Moreover, if the
industry has a lot of low-production-cost companies producing seasonal products sensitive to
price change and without enough market time to withstand incorrect selling prices, then the
company could face a lot of trouble for valuing their own financial interests above knowledge of
industry competition.

Life-Cycle Pricing Strategy

Life-cycle pricing strategy includes the life-cycle costs of a production that a business
accrues from the products research and development stage to its final customer service and
support stage. The biggest benefit of having this more complete pricing strategy is that the
company is wary of the life-cycle costs of giving birth to a product and putting it out onto the
market. Specifically, other pricing strategies would not consider the costs of research,
development, design, production, marketing, distribution, and customer-service. With proper life-
cycle budgeting, companies can gauge the cost of these entities and incorporate their calculations
into the products selling price for an amount that would be better able to offset the companys
long-term product costs. Some of the distinct disadvantages of such a pricing strategy especially
come into play when dealing with the healthcare industry. Specifically, if a drug like albuterol
took years and years of research and development with initial overly expensive stages, then life-
cycle costing would not be feasible in terms of selling a reasonable amount of medication as
products selling price may be too expensive and out-of-reach for its target market. Also, if a
company were to use some of its initial research and development findings to yield a sub-par
product that would necessitate increased marketing and distribution costs to compensate for its
poor intrinsic quality, then the company may grossly overprice its product in the aim of including
the entire life-cycle instead of considering the natural fluctuations of the costs of various product
life cycle stages.

References
Bodoni, S. (2016, May 10). LuxLeaks Whistleblowers Face Prison for Theft of PwC Tax Files.
Retrieved May 23, 2017, from https://www.bloomberg.com/news/articles/2016-05-10/luxleaks-
whistleblowers-face-prison-for-theft-of-pwc-tax-files

Horngren, C. T., Datar, S. M., & Rajan, M. V. (2014). Cost accounting: a managerial emphasis.
Pearson .