By Prof. Eva Z. Quiñones The Buenas Cosas Corporation has had an
average yearly increase in Gross Profit Margin (GPM) of 10% over the last 5 years. This year's quarterly report shows a 2% GMP increase, and management expects a decrease in GMP for the last quarter of the year.
The general manager is concerned about these reports and decides to hold a meeting with the operations managers and the controller. The purpose is to discuss the third quarter report and to
find ways of stopping the current downward GMP path.
The operations manager recommended obtaining better control over product costs by using ABC Costing and Total Quality Management. This is
especially important given the fact that the current market is highly competitive and an increase in selling price would lose substantial market share.
The controller suggested a creative way for
achieving an immediate decrease in cost: to change the inventory method to one that can decrease the reported Cost of Goods Sold. After his suggestion, a discussion began among the operations manager, the general
manager, and the controller:
Operations Manager: "We have been using the same inventory method for many years and have received good results from it. Don't fix it if it ain't broken."
Controller: "There is nothing wrong with the present inventory method. However, a change in the accounting method for inventory can lead us to an increase in profits or at least the appearance of an
increase."
General Manager: "The external auditor will notice the change in inventory method. We have obtained clean opinion from them in all the previous years. Why jeopardize our good
reputation?"
Controller: "The accounting profession allows us to change accounting methods although it encourages overall consistency. We only need to show that the new method is preferable in some
way. Then we must disclose the effects of the change in the financial statements.
Operations Manager: From what I remember of my accounting courses in college, we need to disclose the effect of the
change in the previous years also. This could have a negative impact on the amounts reported in these years.
Controller: We can choose a method that will have a positive impact in profits of the
previous years and in the current year. The accounting team can then justify the change and make the necessary calculations.
General Manager: "It sounds good to me. The accounting change in
the inventory method will solve our immediate problem. In addition, we will have enough time to find alternatives to improve operations for next year. So go ahead and make all the necessary
calculations. We need to improve the GMP by the end of the year.
Questions:
1. Evaluate the final decision of the general manager in terms of the following two demands: (a) a
change in accounting method should result in financial statements that provide more useful information to users; (b) a change in accounting method should not be used to improve artificially the reported performance and
financial position of an organization.
2. Suppose you were also participating in this meeting. How would you respond to the arguments of the operations manager and the controller? What
alternatives would you propose in the case you rejected those proposed in the meeting?
3. Clarify the problem(s) facing the general manager. How would you classify? What kinds of constraints
must a successful solution meet?
