Question: The controller of Tri Con Global Systems Inc. has developed a new costing system that traces the cost of activities to products. The new system
The controller of Tri Con Global Systems Inc. has developed a new costing system that traces the cost of activities to products. The new system is able to measure post-manufacturing activities, such as selling, promotional, and distribution activities, and allocate these activities to products in a manner that provides a more complete view of the company's product costs. This system produces better strategic information about the relative profitability of product lines.
In the course of implementing the new costing system, the controller realized that the company's current period GAAP net income would increase significantly if the new product cost information were used for inventory valuation on the financial statements. The controller has been under intense pressure to improve the company's net income, and this would be an easy and effective way for her to help meet the company's short-term net income goals. As a result, she has decided to use the new costing system to determine GAAP net income.
1. Why does the company's net income increase when the new costing system is applied?
2. Is the controller acting ethically by using the new costing system for GAAP net income? Explain your answer.
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1 The net income is larger because the controller took period costs and treated them as product costs for financial reporting purposes All of the postmanufacturing costs should be treated as an expense in the period incurred according to generally accepted accounting principles GAAP If treated as product costs for financial reporting purposes some of these period costs are included in inventory while the rest are included in the cost of goods sold As a result the net income would be higher by the amount of period cost included capitalized in inventory 2 The controller is not behaving ethically because the financial statements do not present fairly the results of operations according to GAAP The new activitybased costing information may be very useful for internal decision making but the postmanufacturing period costs cannot be included as a product cost ... View full answer
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