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Managerial Accounting and Control System MF Capistrano


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Scott Hewitt, the new Plant Manager of Old World Manufacturing Plant Number 7, has just
reviewed a draft of his year-end financial statements. Hewitt receives a year-end bonus of 12%
of the plant’s operating income before tax. The year-end income statement provided by the plant’s
controller was disappointing to say the least. After reviewing the numbers, Hewitt demanded that
his controller go back and “work the numbers” again. Hewitt insisted that if he didn’t see a better
operating income number the next time around he would be forced to look for a new controller.
Old World Manufacturing classifies all costs directly related to the manufacturing of its
products as product costs. These costs are inventoried and later expensed as costs of goods sold
when the product is sold. All other expenses, including finished goods warehousing costs of
Php3,600,000 are classified as period expenses. Hewitt had suggested that warehousing costs
be included as product costs because they are “definitely related to our product”. The company
produced 300,000 units during the period and sold 250,000 units.
As the controller reworked the numbers he discovered that if he included warehousing
costs as product costs, he could improve operating income by Php360,000. He was also sure
these new numbers would make Hewitt happy.
1. Show numerically (computation) how operating income would improve by Php360,000 just
by classifying the preceding costs as product costs instead of period costs.
2. Is Hewitt correct in his justification that these costs “are definitely related to our product”?
3. By how much will Hewitt profit personally if the controller makes the adjustments in
requirement 1?
4. What should the plant controller do?


Richmond, Inc., operates a chain of 44 department stores. Two years ago, the board of
directors of Richmond approved a large-scale remodelling of its store to attract a more upscale
Before finalizing these plans, two stores were remodelled as a test. Linda Perlman,
assistant controller, was asked to oversee the financial reporting for these test stores, and she
and other management personnel were offered bonuses based on the sales growth and
profitability of these stores. While completing the financial reports, Perlman discovered a sizable
inventory if outdated goods that should have been discounted for sale or returned to the
manufacturer. She discussed the situation with her management colleagues; the consensus was
to ignore reporting this inventory as obsolete because reporting it would diminish the financial
results and their bonuses.
Managerial Accounting and Control System MF Capistrano


1. According to the IMA’s Statement of Ethical Professional Practice, would it be ethical for
Perlman not to report the inventory as obsolete?
2. Would it be easy for Perlman to take the ethical action in this situation?

Answer each question or requirement briefly and direct to the point.
A. “As a practical matter, planning and control mean exactly the same thing.” Do you agree
with this statement? Explain.

B. Why do measures used in a balanced scorecard differ from company to company?

C. Why are fixed costs generally more relevant in long-run decisions than short-run