, SOLUTION MANUAL FOR Cost Management 6th Edition Hansen
Important Notes
The file includes the complete test bank, organized chapter by chapter.
A sample of selected pages has been provided for preview.
All available appendices and Excel files (if included in the original resources) are
provided.
We continuously update our files to ensure you receive the latest and most accurate
editions.
New editions are added regularly – stay connected for updates!
✅ Why Buy From Us?
📚 Complete & organized chapter-by-chapter – no missing content, no guessing.
⚡ Instant digital delivery – get your file the moment you pay, no waiting.
📅 Always up to date – we track new editions so you always get the latest version.
💬 Friendly support – real humans ready to help, anytime you need us.
🔒 Safe & secure – thousands of satisfied students trust us every semester.
🛡️Our Guarantees
💰 Money-Back Guarantee: Not satisfied? We offer a full refund – no questions asked.
🔄 Wrong File? No Problem: Contact us and we will replace it immediately with the
correct version, free of charge.
⏰ 24/7 Support: We are always here – reach out anytime and expect a fast response.
Contact Email:
, CHAPTER 1
INTRODUCTION TO COST MANAGEMENT
EXERCISES
Exercise 1-1
a. FS g. CMS
b. FS h. FS
c. CMS i. CMS
d. CMS j. CMS
e. FS k. FS
f. CMS l. FS
Exercise 1-2
1. Customers can be internal or external. Users of the component produced by
Barry’s department are his internal customers. This includes the Assembly
Department and the Rework Department. They are directly affected by the
quality of the product produced by Barry’s department. In a sense, those who
buy the cell phones are his customers too—after all, the functionality of the
MP3 player is affected by the quality and reliability of its components.
2. Barry’s department is producing a low-quality component. One out of every
50 units is having a high defect rate and is causing a lot of rework. Being
sensitive would require a dramatic reduction in the defect rate. A reduction in
the defect rate would decrease cycle time, lower the rework rate, and
decrease costs. These improvements in quality create the potential to
increase value for external customers and make the life of internal customers
much easier. In turn, these quality enhancements will likely help Hepworth
please a key stakeholder (customers) more consistently, thereby increasing
sales and/or decreasing quality-related costs, both of which increase
Hepworth’s value over the long term.
3. Cost management can provide information concerning quality—both financial
and nonfinancial. Defect rates can be tracked over time. Rework costs
attributable to defective components from Barry’s department can be
measured and tracked over time. Cycle time reductions due to improved
quality can be measured and reported. Product cost reductions attributable to
improved quality can be reported.
1
© 2026 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,Exercise 1-3
a. Planning and control h. Planning and control
b. Costing of service i. Decision making
c. Costing of product/activity j. Costing of service
d. Planning and control k. Costing of an activity
e. Planning and control l. Planning and control
f. Decision making m. Decision making
g. Costing of product
Exercise 1-4
The manager is clearly considering unethical behaviors, especially the decisions
associated with reducing maintenance and promotional salaries. Extending asset
life for depreciation has less clear ethical implications. Reducing maintenance
may not hurt much in the short run but will have long-run negative financial
consequences. Furthermore, the decision for promotions has been made with a
given set of financial expectations, and reducing the salary increases by 50
percent for deserving employees is obviously unfair to them. Although the
manager is not a cost or management accountant, they are violating the ethical
standard under integrity that requires him to “refrain from engaging in any
conduct that would prejudice carrying out duties ethically” (III-2).
The reduction in promotional salary increases is particularly egregious in that they
are reducing the salaries of others so that they may benefit. In effect, they are
stealing from their subordinates. The reduction in maintenance budget is also a form
of stealing—robbing future service potential to produce a current personal benefit.
An ethical dilemma does exist if the manager carries through with his plans. The
dilemma exists because the manager wants to manipulate income to achieve
personal financial gain. A company code of ethics and compliance monitoring is
one recommendation. An internal audit could be used to detect and deter such
questionable behavior. Furthermore, a company policy requiring managers to
justify any expenditure reductions in writing to both the employees and higher
management could discourage behavior like the manager’s. The best control,
however, is hiring managers with the integrity to do the right thing even when
faced with the opportunity to cheat or steal.
2
© 2026 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,Exercise 1-5
1. The controller wants a written record of spoiled material in order to more
closely control it. From a behavioral perspective, the formal record keeping of
spoilage will make it seem more important to individuals on the factory floor.
If the company has a total quality management program in effect, keeping
track of spoilage can make it easier to note trends and ensure that spoilage is
being reduced over time. Additionally, the formal reporting of spoilage may
make it easier to pinpoint the areas in which spoilage occurs and may enable
management to improve the system to eliminate spoilage. Employees should
be made aware that the purpose of tracking spoilage is to eliminate it, not to
fix blame.
It is possible that everybody doesn’t know what the spoilage rate is. Some
people may think it is high; others may think it is low. A written record of
spoilage will prevent a certain amount of pointless arguing about this. For
example, the plant manager will not be forced to rely on the production
manager’s assessment of spoilage. Instead, both managers can rely on the
recorded spoilage to determine how much is occurring and how it can best be
reduced.
2. The production manager correctly understands that keeping track of spoilage
is additional work. This will cost the plant in one way or another. Even if an
additional worker need not be hired, the workers who do record spoilage, by
definition, will not be doing something else. The production manager should
work together with the controller to ensure that the costs of recording
spoilage do not exceed the benefits. He should also attempt to make the
recording as easy as possible and concentrate on the “expensive” spoilage.
Finally, his remark indicates that workers may hide spoilage to avoid
responsibility. They may “steal” it and then dispose it, or they may simply
pass on a bad unit to the next process. Either approach is costly and not in
harmony with the goal of improving quality. These problems can be avoided
by training, education, and the installation of controls.
Exercise 1-6
1. Planning. The management accountant gains an understanding of the impact on
the organization of planned transactions (i.e., analyzing strengths and
weaknesses) and economic events (both strategic and tactical) and sets
obtainable goals for the organization. The development of budgets is an example
of planning.
Control and evaluation. The management accountant ensures the integrity of
financial information, monitors performance against budgets and goals, and
provides information internally for decision making. Comparing actual
performance against budgeted performance and taking corrective action
where necessary is an example of control and evaluation.
3
© 2026 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,Exercise 1-6 (Continued)
Continuous improvement. The management accountant helps identify
opportunities for improvement, measures the projected costs and benefits, and
reports on the actual outcomes.
Decision making. The management accountant helps in the analysis of
various alternatives and in the choice of the optimal course of action.
2. a. Planning: expected price, cost, and tax information are needed.
b. Continuous improvement: cost savings from improved order entry quality
and improved customer satisfaction.
c. Control and evaluation: a performance report triggered the investigation
that led to corrective action.
d. Decision making: relevant cost information is needed to decide whether to
make or buy the component.
e. Decision making: accounting must analyze cost-volume-profit effects.
f. Continuous improvement: initial quality costs by category with reports
revealing their changes over time.
g. Planning: price and cost information with budgeted income statements are
needed.
h. Continuous improvement: cost information for moving and waiting
activities and finished goods inventories (e.g., carrying costs). Revenues
for the increased market share would also be needed.
Exercise 1-7
Kaylin Hepworth is a line manager with direct responsibility for producing a major
component of the plant’s products. The basic objective of the plant is to produce
speakers, and Kaylin plays a direct role in achieving this objective.
Joseph Nguyen is a line manager with direct responsibility for producing
speakers. This is the basic objective of the plant. Thus, Joseph has direct
responsibility for a basic objective and holds a line position.
Leo Tidwell is staff. He is in a support role—he prepares reports and helps
explain and interpret them. His role is to help the plant manager and other line
managers more effectively carry out their responsibilities.
4
© 2026 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, PROBLEMS
Problem 1-8
Dear Jade,
I am pleased that you are considering taking an accounting course to
complement your hotel and restaurant major. You will find that a basic knowledge
of accounting will place you in good stead in dealing with the business aspects of
hotel management.
Financial accounting is primarily aimed at outside parties. It involves generating
financial statements that describe the assets and liabilities of a business and the
periodic income earned. You will find that investors, lenders, the IRS, and other
local, state, and federal regulatory and licensing agencies will appreciate a good
solid financial accounting system.
Cost management is concerned with determining the costs of things like
products, services, and activities. It is also concerned with using financial and
nonfinancial information for planning, controlling, continuous improvement, and
decision making. In your case, you will want to budget and control costs for a
hotel. You may want to determine the costs and revenues of different services.
For example, is it worthwhile to offer a Sunday brunch for hotel guests?
As you might guess, courses in both financial and cost management would be of
value. If you cannot afford the time to take both accounting courses, a good solid
background course in cost and management accounting would be best. Good
luck with your goal of becoming a hotel manager!
Sincerely,
5
© 2026 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,Problem 1-9
At first, this seems simple. Couldn’t John simply mention that Patty had already
accepted a position as controller in another company? Since the decision was a
close one between the two, this information would likely tip the balance in favor of
John. However, some ethical issues should be considered. First, the information that
Patty gave was likely given in confidence, and John should not disclose this
confidential information without her permission. Second, disclosing the confidential
information may provide a personal benefit to John. Third, it may be that Patty will
change her mind about the position she has accepted (assuming she can withdraw
honorably from the acceptance) once she is officially aware of the promotion. This
decision and its consequences should be Patty’s and not John’s. If I were John, I
would leave the response to the promotion entirely in Patty’s hands. Once offered the
position, she may simply indicate that she cannot accept it because she is committed
to another job. This may then cleanly open up the position for John.
Problem 1-10
1. Emily should not implement the suggested accounting procedures because
they conflict with generally accepted accounting principles and violate
Sections I and III of the Standards of Ethical Conduct for Management
Accountants. It raises serious ethical questions in the areas of competence
and integrity; for example, Emily is not able to “perform professional duties in
accordance with relevant laws, regulations, and technical standards” or
“communicate information fairly and objectively.”
2. Emily should discuss the problem with the next highest management level (if
the divisional manager’s mind cannot be changed). This could be, for
example, the corporate controller or the chief executive officer (CEO). She
could also discuss the matter with an objective advisor to assess possible
courses of action. In some firms, ethical hotlines exist that will allow the
dilemma to be analyzed. If no resolution is obtained, then resignation may be
called for.
6
© 2026 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,Problem 1-11
The proposed changes violate the following ethical standards:
Competence. Top management’s request for Kala Smith to account for the
company’s information in a manner that is not in accordance with generally
accepted accounting principles violates the standard to “perform professional
duties in accordance with relevant laws, regulations, and technical standards.” (I-2)
Confidentiality. Top management has violated the ethical standard of “refrain[ing]
from using confidential information for unethical or illegal advantage.” (II-3)
Integrity. Top management has violated the standard to “avoid actual or apparent
conflicts of interest and advise all appropriate parties [other shareholders] of any
potential conflict.” (III-1)
The motivation for top management in this circumstance may be reinforced by
the favorable bonus situation, which is in violation of the standard to “refuse any
gift, favor [bonus], or hospitality that would influence their actions.”
Credibility. Top management’s restriction and distortion of Silverado’s financial
information violates the standard to “communicate information fairly and
objectively.” (IV-1)
By telling Kala to restrict the disclosure of the changes, top management is clearly in
violation of the standard to “communicate unfavorable as well as favorable
information.”
To resolve the ethical dilemma, Kala should first determine if the company has an
established policy. If so, she should follow the prescribed policies in resolving
the ethical conflict. If there is no policy, then the specific steps are as follows:
a. To confront top management about the unethical behavior unless Kala
believes that they are involved, in which case the problem should be
presented to the next higher level, the chairman of the board of directors. If
this fails, then the issue can be taken to the audit committee and the board of
directors.
b. To clarify relevant concepts by confidential discussion with an objective
advisor to obtain possible courses of action.
c. To resign and submit an informative memorandum to the chairman of the
board of directors, if all levels of internal review have been exhausted and the
conflict still exists.
7
© 2026 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, Problem 1-12
By discussing the possible sale of Emery’s common stock with members of the
troubleshooting team, Gus Swanson has violated the following standards of
ethical conduct:
Competence (I). Gus has an obligation to perform his duties in accordance with
relevant laws and regulations. By discussing the information he learned about, he
may have violated laws regulating the use of inside information.
Confidentiality (II). Gus has disclosed confidential information acquired in the
course of his work that he has not been authorized to share with peers and others
within the organization. In addition, he has not informed subordinates of the
confidential nature of the information nor has he attempted to prevent the further
distribution of this information.
Integrity (III). By discussing this information, Gus has engaged in an activity that
would discredit his profession and prejudice his ability to carry out his duties
ethically.
Credibility (IV). Gus has violated the requirement to communicate all information
fairly and objectively.
Problem 1-13
1. Assuming the controller did not inform the CEO and CFO of the situation, the
ethical considerations of the controller’s apparent lack of action, as covered
in the Standards of Ethical Conduct for Management Accountants, are as
follows:
Competence (I). Management accountants have a responsibility to perform their
professional duties in accordance with the relevant laws, regulations, and
technical standards. The controller’s apparent lack of action regarding the
overstatement of inventory and lack of provision for potential purchase
commitment losses do not comply with generally accepted accounting
principles.
Integrity (III). Management accountants have a responsibility to avoid
conflicts of interest, refrain from engaging in any activity that would prejudice
their ability to execute their duties ethically, and refrain from engaging in any
activity that would discredit their profession.
Credibility (IV). Management accountants have a responsibility to
communicate information fairly and objectively and to fully disclose
information that could influence an intended user’s understanding of the
reports.
8
© 2026 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Important Notes
The file includes the complete test bank, organized chapter by chapter.
A sample of selected pages has been provided for preview.
All available appendices and Excel files (if included in the original resources) are
provided.
We continuously update our files to ensure you receive the latest and most accurate
editions.
New editions are added regularly – stay connected for updates!
✅ Why Buy From Us?
📚 Complete & organized chapter-by-chapter – no missing content, no guessing.
⚡ Instant digital delivery – get your file the moment you pay, no waiting.
📅 Always up to date – we track new editions so you always get the latest version.
💬 Friendly support – real humans ready to help, anytime you need us.
🔒 Safe & secure – thousands of satisfied students trust us every semester.
🛡️Our Guarantees
💰 Money-Back Guarantee: Not satisfied? We offer a full refund – no questions asked.
🔄 Wrong File? No Problem: Contact us and we will replace it immediately with the
correct version, free of charge.
⏰ 24/7 Support: We are always here – reach out anytime and expect a fast response.
Contact Email:
, CHAPTER 1
INTRODUCTION TO COST MANAGEMENT
EXERCISES
Exercise 1-1
a. FS g. CMS
b. FS h. FS
c. CMS i. CMS
d. CMS j. CMS
e. FS k. FS
f. CMS l. FS
Exercise 1-2
1. Customers can be internal or external. Users of the component produced by
Barry’s department are his internal customers. This includes the Assembly
Department and the Rework Department. They are directly affected by the
quality of the product produced by Barry’s department. In a sense, those who
buy the cell phones are his customers too—after all, the functionality of the
MP3 player is affected by the quality and reliability of its components.
2. Barry’s department is producing a low-quality component. One out of every
50 units is having a high defect rate and is causing a lot of rework. Being
sensitive would require a dramatic reduction in the defect rate. A reduction in
the defect rate would decrease cycle time, lower the rework rate, and
decrease costs. These improvements in quality create the potential to
increase value for external customers and make the life of internal customers
much easier. In turn, these quality enhancements will likely help Hepworth
please a key stakeholder (customers) more consistently, thereby increasing
sales and/or decreasing quality-related costs, both of which increase
Hepworth’s value over the long term.
3. Cost management can provide information concerning quality—both financial
and nonfinancial. Defect rates can be tracked over time. Rework costs
attributable to defective components from Barry’s department can be
measured and tracked over time. Cycle time reductions due to improved
quality can be measured and reported. Product cost reductions attributable to
improved quality can be reported.
1
© 2026 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,Exercise 1-3
a. Planning and control h. Planning and control
b. Costing of service i. Decision making
c. Costing of product/activity j. Costing of service
d. Planning and control k. Costing of an activity
e. Planning and control l. Planning and control
f. Decision making m. Decision making
g. Costing of product
Exercise 1-4
The manager is clearly considering unethical behaviors, especially the decisions
associated with reducing maintenance and promotional salaries. Extending asset
life for depreciation has less clear ethical implications. Reducing maintenance
may not hurt much in the short run but will have long-run negative financial
consequences. Furthermore, the decision for promotions has been made with a
given set of financial expectations, and reducing the salary increases by 50
percent for deserving employees is obviously unfair to them. Although the
manager is not a cost or management accountant, they are violating the ethical
standard under integrity that requires him to “refrain from engaging in any
conduct that would prejudice carrying out duties ethically” (III-2).
The reduction in promotional salary increases is particularly egregious in that they
are reducing the salaries of others so that they may benefit. In effect, they are
stealing from their subordinates. The reduction in maintenance budget is also a form
of stealing—robbing future service potential to produce a current personal benefit.
An ethical dilemma does exist if the manager carries through with his plans. The
dilemma exists because the manager wants to manipulate income to achieve
personal financial gain. A company code of ethics and compliance monitoring is
one recommendation. An internal audit could be used to detect and deter such
questionable behavior. Furthermore, a company policy requiring managers to
justify any expenditure reductions in writing to both the employees and higher
management could discourage behavior like the manager’s. The best control,
however, is hiring managers with the integrity to do the right thing even when
faced with the opportunity to cheat or steal.
2
© 2026 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,Exercise 1-5
1. The controller wants a written record of spoiled material in order to more
closely control it. From a behavioral perspective, the formal record keeping of
spoilage will make it seem more important to individuals on the factory floor.
If the company has a total quality management program in effect, keeping
track of spoilage can make it easier to note trends and ensure that spoilage is
being reduced over time. Additionally, the formal reporting of spoilage may
make it easier to pinpoint the areas in which spoilage occurs and may enable
management to improve the system to eliminate spoilage. Employees should
be made aware that the purpose of tracking spoilage is to eliminate it, not to
fix blame.
It is possible that everybody doesn’t know what the spoilage rate is. Some
people may think it is high; others may think it is low. A written record of
spoilage will prevent a certain amount of pointless arguing about this. For
example, the plant manager will not be forced to rely on the production
manager’s assessment of spoilage. Instead, both managers can rely on the
recorded spoilage to determine how much is occurring and how it can best be
reduced.
2. The production manager correctly understands that keeping track of spoilage
is additional work. This will cost the plant in one way or another. Even if an
additional worker need not be hired, the workers who do record spoilage, by
definition, will not be doing something else. The production manager should
work together with the controller to ensure that the costs of recording
spoilage do not exceed the benefits. He should also attempt to make the
recording as easy as possible and concentrate on the “expensive” spoilage.
Finally, his remark indicates that workers may hide spoilage to avoid
responsibility. They may “steal” it and then dispose it, or they may simply
pass on a bad unit to the next process. Either approach is costly and not in
harmony with the goal of improving quality. These problems can be avoided
by training, education, and the installation of controls.
Exercise 1-6
1. Planning. The management accountant gains an understanding of the impact on
the organization of planned transactions (i.e., analyzing strengths and
weaknesses) and economic events (both strategic and tactical) and sets
obtainable goals for the organization. The development of budgets is an example
of planning.
Control and evaluation. The management accountant ensures the integrity of
financial information, monitors performance against budgets and goals, and
provides information internally for decision making. Comparing actual
performance against budgeted performance and taking corrective action
where necessary is an example of control and evaluation.
3
© 2026 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,Exercise 1-6 (Continued)
Continuous improvement. The management accountant helps identify
opportunities for improvement, measures the projected costs and benefits, and
reports on the actual outcomes.
Decision making. The management accountant helps in the analysis of
various alternatives and in the choice of the optimal course of action.
2. a. Planning: expected price, cost, and tax information are needed.
b. Continuous improvement: cost savings from improved order entry quality
and improved customer satisfaction.
c. Control and evaluation: a performance report triggered the investigation
that led to corrective action.
d. Decision making: relevant cost information is needed to decide whether to
make or buy the component.
e. Decision making: accounting must analyze cost-volume-profit effects.
f. Continuous improvement: initial quality costs by category with reports
revealing their changes over time.
g. Planning: price and cost information with budgeted income statements are
needed.
h. Continuous improvement: cost information for moving and waiting
activities and finished goods inventories (e.g., carrying costs). Revenues
for the increased market share would also be needed.
Exercise 1-7
Kaylin Hepworth is a line manager with direct responsibility for producing a major
component of the plant’s products. The basic objective of the plant is to produce
speakers, and Kaylin plays a direct role in achieving this objective.
Joseph Nguyen is a line manager with direct responsibility for producing
speakers. This is the basic objective of the plant. Thus, Joseph has direct
responsibility for a basic objective and holds a line position.
Leo Tidwell is staff. He is in a support role—he prepares reports and helps
explain and interpret them. His role is to help the plant manager and other line
managers more effectively carry out their responsibilities.
4
© 2026 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, PROBLEMS
Problem 1-8
Dear Jade,
I am pleased that you are considering taking an accounting course to
complement your hotel and restaurant major. You will find that a basic knowledge
of accounting will place you in good stead in dealing with the business aspects of
hotel management.
Financial accounting is primarily aimed at outside parties. It involves generating
financial statements that describe the assets and liabilities of a business and the
periodic income earned. You will find that investors, lenders, the IRS, and other
local, state, and federal regulatory and licensing agencies will appreciate a good
solid financial accounting system.
Cost management is concerned with determining the costs of things like
products, services, and activities. It is also concerned with using financial and
nonfinancial information for planning, controlling, continuous improvement, and
decision making. In your case, you will want to budget and control costs for a
hotel. You may want to determine the costs and revenues of different services.
For example, is it worthwhile to offer a Sunday brunch for hotel guests?
As you might guess, courses in both financial and cost management would be of
value. If you cannot afford the time to take both accounting courses, a good solid
background course in cost and management accounting would be best. Good
luck with your goal of becoming a hotel manager!
Sincerely,
5
© 2026 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,Problem 1-9
At first, this seems simple. Couldn’t John simply mention that Patty had already
accepted a position as controller in another company? Since the decision was a
close one between the two, this information would likely tip the balance in favor of
John. However, some ethical issues should be considered. First, the information that
Patty gave was likely given in confidence, and John should not disclose this
confidential information without her permission. Second, disclosing the confidential
information may provide a personal benefit to John. Third, it may be that Patty will
change her mind about the position she has accepted (assuming she can withdraw
honorably from the acceptance) once she is officially aware of the promotion. This
decision and its consequences should be Patty’s and not John’s. If I were John, I
would leave the response to the promotion entirely in Patty’s hands. Once offered the
position, she may simply indicate that she cannot accept it because she is committed
to another job. This may then cleanly open up the position for John.
Problem 1-10
1. Emily should not implement the suggested accounting procedures because
they conflict with generally accepted accounting principles and violate
Sections I and III of the Standards of Ethical Conduct for Management
Accountants. It raises serious ethical questions in the areas of competence
and integrity; for example, Emily is not able to “perform professional duties in
accordance with relevant laws, regulations, and technical standards” or
“communicate information fairly and objectively.”
2. Emily should discuss the problem with the next highest management level (if
the divisional manager’s mind cannot be changed). This could be, for
example, the corporate controller or the chief executive officer (CEO). She
could also discuss the matter with an objective advisor to assess possible
courses of action. In some firms, ethical hotlines exist that will allow the
dilemma to be analyzed. If no resolution is obtained, then resignation may be
called for.
6
© 2026 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,Problem 1-11
The proposed changes violate the following ethical standards:
Competence. Top management’s request for Kala Smith to account for the
company’s information in a manner that is not in accordance with generally
accepted accounting principles violates the standard to “perform professional
duties in accordance with relevant laws, regulations, and technical standards.” (I-2)
Confidentiality. Top management has violated the ethical standard of “refrain[ing]
from using confidential information for unethical or illegal advantage.” (II-3)
Integrity. Top management has violated the standard to “avoid actual or apparent
conflicts of interest and advise all appropriate parties [other shareholders] of any
potential conflict.” (III-1)
The motivation for top management in this circumstance may be reinforced by
the favorable bonus situation, which is in violation of the standard to “refuse any
gift, favor [bonus], or hospitality that would influence their actions.”
Credibility. Top management’s restriction and distortion of Silverado’s financial
information violates the standard to “communicate information fairly and
objectively.” (IV-1)
By telling Kala to restrict the disclosure of the changes, top management is clearly in
violation of the standard to “communicate unfavorable as well as favorable
information.”
To resolve the ethical dilemma, Kala should first determine if the company has an
established policy. If so, she should follow the prescribed policies in resolving
the ethical conflict. If there is no policy, then the specific steps are as follows:
a. To confront top management about the unethical behavior unless Kala
believes that they are involved, in which case the problem should be
presented to the next higher level, the chairman of the board of directors. If
this fails, then the issue can be taken to the audit committee and the board of
directors.
b. To clarify relevant concepts by confidential discussion with an objective
advisor to obtain possible courses of action.
c. To resign and submit an informative memorandum to the chairman of the
board of directors, if all levels of internal review have been exhausted and the
conflict still exists.
7
© 2026 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, Problem 1-12
By discussing the possible sale of Emery’s common stock with members of the
troubleshooting team, Gus Swanson has violated the following standards of
ethical conduct:
Competence (I). Gus has an obligation to perform his duties in accordance with
relevant laws and regulations. By discussing the information he learned about, he
may have violated laws regulating the use of inside information.
Confidentiality (II). Gus has disclosed confidential information acquired in the
course of his work that he has not been authorized to share with peers and others
within the organization. In addition, he has not informed subordinates of the
confidential nature of the information nor has he attempted to prevent the further
distribution of this information.
Integrity (III). By discussing this information, Gus has engaged in an activity that
would discredit his profession and prejudice his ability to carry out his duties
ethically.
Credibility (IV). Gus has violated the requirement to communicate all information
fairly and objectively.
Problem 1-13
1. Assuming the controller did not inform the CEO and CFO of the situation, the
ethical considerations of the controller’s apparent lack of action, as covered
in the Standards of Ethical Conduct for Management Accountants, are as
follows:
Competence (I). Management accountants have a responsibility to perform their
professional duties in accordance with the relevant laws, regulations, and
technical standards. The controller’s apparent lack of action regarding the
overstatement of inventory and lack of provision for potential purchase
commitment losses do not comply with generally accepted accounting
principles.
Integrity (III). Management accountants have a responsibility to avoid
conflicts of interest, refrain from engaging in any activity that would prejudice
their ability to execute their duties ethically, and refrain from engaging in any
activity that would discredit their profession.
Credibility (IV). Management accountants have a responsibility to
communicate information fairly and objectively and to fully disclose
information that could influence an intended user’s understanding of the
reports.
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