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Case from journal
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Reference no. JIACS16SI-01-06
Published by: Allied Business Academies
Published in: "Journal of the International Academy for Case Studies", 2010

Abstract

This case examines the income inflation opportunities available to unethical managers. These opportunities arise when production exceeds sales and occurs as a result of the differences between absorption costing and variable costing. An absorption costing income statement is provided at three different sales levels with production remaining constant. The case asks students to use that information to prepare a variable costing income statement at those same levels assuming production remains constant. The case also asks students to differentiate between fixed and variable costs, to discuss ethical choices, and to discuss the ‘tone at the top’. The primary subject matter of this case concerns income inflation opportunities when GAAP based absorption costing is used as compared to internally used variable costing when more inventory is produced than sold. Secondary issues examined include distinctions between financial and managerial accounting; ethical responsibilities of managers, Certified Public Accountants and Certified Management Accountants; organizational climate of institutions; fixed costs vs variable costs; and how inaccurate reporting in one year may affect financial statements in other years. This case can be tailored to three different difficulty levels; level two , appropriate for sophomore Principles of Managerial Accounting; level three, appropriate for junior Cost Accounting; and level five, appropriate for graduate level Managerial Accounting. This case is designed to be taught in one-half hour of class time and is expected to require one hour of outside preparation by students.

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Abstract

This case examines the income inflation opportunities available to unethical managers. These opportunities arise when production exceeds sales and occurs as a result of the differences between absorption costing and variable costing. An absorption costing income statement is provided at three different sales levels with production remaining constant. The case asks students to use that information to prepare a variable costing income statement at those same levels assuming production remains constant. The case also asks students to differentiate between fixed and variable costs, to discuss ethical choices, and to discuss the ‘tone at the top’. The primary subject matter of this case concerns income inflation opportunities when GAAP based absorption costing is used as compared to internally used variable costing when more inventory is produced than sold. Secondary issues examined include distinctions between financial and managerial accounting; ethical responsibilities of managers, Certified Public Accountants and Certified Management Accountants; organizational climate of institutions; fixed costs vs variable costs; and how inaccurate reporting in one year may affect financial statements in other years. This case can be tailored to three different difficulty levels; level two , appropriate for sophomore Principles of Managerial Accounting; level three, appropriate for junior Cost Accounting; and level five, appropriate for graduate level Managerial Accounting. This case is designed to be taught in one-half hour of class time and is expected to require one hour of outside preparation by students.

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