Problems

PROBLEM 1–4 Preparing an Organization Chart [LO2]

Bristow University is a large private school located in the Midwest. The university is headed by a president who has five vice presidents reporting to him. These vice presidents are responsible for, respectively, auxiliary services, admissions and records, academics, financial services (controller), and the physical plant.

In addition, the university has managers over several areas who report to these vice presidents. These include managers over central purchasing, the university press, and the university bookstore, all of whom report to the vice president for auxiliary services; managers over computer services and over accounting and finance, who report to the vice president for financial services; and managers over grounds and custodial services and over plant and maintenance, who report to the vice president for physical plant.

The university has four colleges—business, humanities, fine arts, and engineering and quantitative methods—and a law school. Each of these units has a dean who is responsible to the academic vice president. Each college has several departments.

Required:

Prepare an organization chart for Bristow University.
Which of the positions on your chart would be line positions? Why would they be line positions? Which would be staff positions? Why?
Which of the positions on your chart would have need for accounting information? Explain.

PROBLEM 1–5 Ethics and the Manager [LO4]

Richmond, Inc., operates a chain of department stores located in the northwest that has steadily grown to its present size of 44 stores. Two years ago, the board of directors of Richmond approved a large-scale remodeling of its stores to attract a more upscale clientele.

Before finalizing these plans, two stores were remodeled 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 While completing the financial reports, Perlman discovered a sizable inventory of outdated goods that should have been discounted for sale or returned to the manufacturer.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, since reporting it would diminish the financial results and their bonuses.

Required:

According to the Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management, would it be ethical for Perlman not to report the inventory as obsolete?
Would it be easy for Perlman to take the ethical action in this situation?

(CMA, adapted)

PROBLEM 1–6 Line and Staff Positions [LO2]

Special Alloys Corporation manufactures a variety of specialized metal products for industrial use. Most of the revenues are generated by large contracts with companies that have government defense contracts. The company also develops and markets parts to the major automobile companies. It employs many metallurgists and skilled technicians because most of its products are made from highly sophisticated alloys.

The company recently signed two large contracts; as a result, the workload of Wayne Washburn, the general manager, has become overwhelming. To relieve some of this overload, Mark Johnson was transferred from the Research Planning Department to the general manager’s office. Johnson, who has been a senior metallurgist and supervisor in the Research Planning Department, was given the title “assistant to the general manager.”

Washburn assigned several responsibilities to Johnson in their first meeting. Johnson will oversee the testing of new alloys in the Product Planning Department and be given the authority to make decisions as to the use of these alloys in product development; he will also be responsible for maintaining the production schedules for one of the new contracts. In addition to these duties, he will be required to meet with the supervisors of the production departments regularly to consult with them about production problems they may be experiencing. Washburn expects to be able to manage the company much more efficiently with Johnson’s help.

Required:

Positions within organizations are often described as having (a) line authority or (b) staff authority. Describe what is meant by these two terms.
Of the responsibilities assigned to Mark Johnson as assistant to the general manager, which tasks have line authority and which have staff authority?
Identify and discuss the conflicts Mark Johnson may experience in the production departments as a result of his new responsibilities.

(CMA, adapted)

PROBLEM 1–7 Ethics in Business [LO4]

Consumers and attorney generals in more than 40 states accused a prominent nationwide chain of auto repair shops of misleading customers and selling them unnecessary parts and services, from brake jobs to front-end alignments. Lynn Sharpe Paine reported the situation as follows in “Managing for Organizational Integrity,” Harvard Business Review, March-April, 1994:

In the face of declining revenues, shrinking market share, and an increasingly competitive market . . . management attempted to spur performance of its auto centers. . . . The automotive service advisers were given product-specific sales quotas—sell so many springs, shock absorbers, alignments, or brake jobs per shift—and paid a commission based on sales. . . . [F]ailure to meet quotas could lead to a transfer or a reduction in work hours. Some employees spoke of the “pressure, pressure, pressure” to bring in sales.
This pressure-cooker atmosphere created conditions under which employees felt that the only way to satisfy top management was by selling products and services to customers that they didn’t really need.

Suppose all automotive repair businesses routinely followed the practice of attempting to sell customers unnecessary parts and services.

Required:

How would this behavior affect customers? How might customers attempt to protect themselves against this behavior?
How would this behavior probably affect profits and employment in the automotive service industry?

PROBLEM 1–8 Ethics; Just-In-Time (JIT) Purchasing [LO3, LO4]

WIW is a publicly owned corporation that makes various control devices used in manufacturing mechanical equipment. J.B. is the president of WIW, Tony is the purchasing agent, and Diane is J.B.’s executive assistant. All three have been with WIW for about five years. Charlie is WIW’s controller and has been with the company for two years.

(The situation described below was adapted from a case published by the Institute of Management Accountants’ Committee on Ethics.^*)

J.B.: Hi, Charlie, come on in. Diane said you had a confidential matter to discuss. What’s on your mind?

Charlie: J.B., I was reviewing our increased purchases from A-1 Warehouse Sales last week and wondered why our volume has tripled in the past year. When I discussed this with Tony he seemed a bit evasive and tried to dismiss the issue by stating that A-1 can give us one-day delivery on our orders.

J.B.: Well, Tony is right. You know we have been trying to implement just-in-time and have been trying to get our inventory down.

Charlie: We still have to look at the overall cost. A-1 is more of a jobber than a warehouse. After investigating orders placed with them, I found that only 10% are delivered from their warehouse and the other 90% are drop-shipped from the manufacturers. The average markup by A-1 is 30%, which amounted to about $600,000 on our orders for the past year. If we had ordered directly from the manufacturers when A-1 didn’t have an item in stock, we could have saved about $540,000 ($600,000 x 90%). In addition, some of the orders were late and not complete.

J.B.: Now look, Charlie, we get quick delivery on most items, and who knows how much we are saving by not having to stock this stuff in advance or worry about it becoming obsolete. Is there anything else on your mind?

Charlie: Well, J.B., as a matter of fact, there is. I ordered a Dun & Bradstreet credit report on A-1 and discovered that Mike Bell is the principal owner. Isn’t he your brother-in-law?

J.B.: Sure he is. But don’t worry about Mike. He understands this JIT approach. Besides, he’s looking out for our interests.

Charlie (to himself): This conversation has been enlightening, but it doesn’t really respond to my concerns. Can I legally or ethically ignore this apparent conflict of interests?

Required:

Would Charlie be justified in ignoring this situation, particularly since he is not the purchasing agent? In preparing your answer, consider the IMA’s Standards of Ethical Conduct.
State the specific steps Charlie should follow to resolve this matter.

^* Neil Holmes, ed., “Ethics,” Management Accounting 73, no. 8 (February 1992), p. 16. Used with permission from the Institute of Management Accountants (IMA), Montvale, N.J., USA, www.imanet.org.

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