Ethical Decision making — promoting inappropriate uses of ABC

When activity-based costing was first developed, consultants sometimes promoted it for inappropriate uses. Many consulting services focused on using ABC information for short-term decisions such as pricing and product emphasis. Yet in the early stages of ABC and activity-based management development, both flexible and committed costs were included in ABC cost pools and were not tracked separately. As a result, ABC unit costs included both fixed and variable costs, even when the fixed costs were irrelevant for decision making. ABC promoters suggested that all costs were variable in the long run, and they ignored criticism of their methods.

If the ABC cost rates include fixed costs, their unquestioned use in setting prices is detrimental to operations. If demand falls, then production volumes might fall too, causing costs per unit to increase followed by increases in prices. This type of pricing policy can lead to a death spiral, in which prices increase inappropriately as volumes decline.

After ABC was developed, it was quickly added to cost accounting curriculums at many different universities. However, a few academics were highly critical of ABC and eventually provided evidence that overhead costs included a large portion of fixed costs, even in the long run.⁸⁰ As research evidence accumulated, ABC consultants advised entities not to allocate facility-level costs and to categorise costs within each activity cost pool as flexible and committed. Then total costs could be used to analyse processes and improve operations, but flexible cost information could be retrieved for decision making.

Currently, ‘incremental ABC cost analysis’ services are being promoted. These services are sometimes called predictive accounting. Because consulting services can be expensive and judging the outcome of new ideas difficult, managers need to incorporate healthy scepticism when considering the potential costs and benefits of products and services promoted by consultants.⁸¹

Required

What ethical problems might arise for managers when considering the use of consultants to develop ABC techniques for sustainability opportunities? Your answers should relate to the promotion of ABC for pricing, other short-term decision, incremental ABC or predictive accounting relating to sustainability opportunities? Answers should also consider the potential for consultant bias and whether the technique will benefit their client particularly when the consulting service might have uncertain outcomes.

            (LO2 and 4)

            Sustainability; outsourcing; monitoring measures

To reduce costs and focus on core competencies, many entities are increasingly outsourcing manufacturing activities to vendors in countries having low labour costs such as China, India, Thailand, Indonesia and Mexico. Certain activists claim that this practice is socially irresponsible. They claim that numerous factory problems in low-cost countries include excessive work hours, poverty wages, toxic gas releases and harassment of union organisers. The problems were exacerbated after the collapse of a garment factory in Bangladesh resulting in 1137 deaths and 2500 injuries. As a result, 41 people, including the building’s owner, were charged with murder or culpable homicide. Such conditions have prompted individuals and organisations to reconsider their purchasing habits and policies. However, some people argued that boycotts against certain companies cause more harm than good; workers who were already poor often lost their jobs, and unionisation efforts and other improvements were hindered.64 They suggest it is difficult for companies to adequately monitor working conditions at outsource locations. Workers were often afraid to talk to inspectors, and they sometimes provided inaccurate information. For example, they sometimes erroneously said that they were not paid overtime because they did not understand how their pay was calculated. In the Bangladesh case, it was found that the owner and managers of the garment factory had forced the workers to enterthe building on the day of the accident despite major cracks appearing on the building a day earlier.

Required

(a)     Describe whether and how sustainability management practices (that is, business practices related to human rights, labour standards and the environment) affect your decisions as a consumer.

(b)     Is it possible for you to know the conditions under which the products you purchase are produced? Why?

(c)     Is it possible for managers of companies that retail the final products to know with certainty that their outsource partners comply with agreed-upon working conditions? Why?

(d)     Would the inclusion of compliance monitoring costs in its purchasing decision process help?

(e)     Identify and explain four measures that a company could use to monitor worker conditions in outsource factories. For each measure, describe how the company might collect reliable data.

(f)      How should entities weigh corporate social responsibility and profits when deciding whether or how to outsource manufacturing? Describe the values you use in drawing your conclusions.

(LO5)

            Performance evaluation and sustainability balanced scorecard

Brewster House is a not-for-profit shelter for the homeless. Lately funding has decreased, but the demand for overnight shelter has increased. In cold weather, clients are turned away because the shelter is full. The director believes that the current capacity could be used more efficiently. No one has taken time to analyse the physical layout of the shelter and current use of space. Several rooms are used for storage that could probably be used for temporary housing. The stored boxes need to be sorted and moved. Volunteers currently assign beds and manage overnight housing, because the director is busy with fundraising. Volunteers work just a few shifts each week, so no one has taken responsibility for coordinating improvements in the services offered. The director is considering whether to implement a balanced scorecard to focus the attention of all volunteers on areas that need improvement.

Brewster receives funds from several sources, including a set annual budget from the local council and direct donations from supporters. The director develops a budget each year based on expected funding but she cannot precisely predict donations. The budget is used primarily to justify funding requests submitted to the council.

The director has asked a group of accounting students from the local university to evaluate operations and recommend whether the entity should develop a balanced scorecard. She cannot give bonuses based on the measures, but she wonders whether developing and monitoring performance measures would encourage the volunteers to increase the use of capacity. She also wonders whether some information from the balanced scorecard could be used to show donors the effectiveness of the operations in achieving social goals.

Required

(a) Describe how the balanced scorecard could be developed to help demonstrate the social sustainability goals.

(b) Provide details of sustainability-related measures for each scorecard perspective you have designed for Brewster House.

(c) What issues would Brewster House management have to overcome to ensure a change in practice?

(LO4 and 5)

Performance evaluation and sustainability balanced scorecard

Refer to comprehensive example 3 and search online for more details about these disasters. Could a performance measurement system be useful in mitigating disasters such as these? Is there any way management accounting could provide useful early warning signals for senior management operating in large decentralised organisations such as these?

(LO4)

            Environmental decision making — Environment Aotearoa and ‘dirty

dairying’ in New Zealand

In October 2015, Statistics New Zealand published the first comprehensive and independent report on the state of the country’s environment. This provided information on five ‘domains’ — air, atmosphere and climate, fresh water, land, and marine. The report was the first in a three-yearly cycle that reports on one domain every six months and provides a combined, comprehensive picture once every three years.

At the time of its release the Minister for Statistics, Craig Foss, stated:

This is the first comprehensive report on New Zealand’s environment produced by Statistics New Zealand. It puts into practice the maxim that you manage what you measure. Robust, independent financial reporting has helped achieve significant improvements in New Zealand’s financial management and our ambition is to achieve the same for the environment.

Similarly, the Minister for the Environment, Nick Smith, explained:

New Zealand’s environment is so important to our quality of life, our successful exporting industries and our nation’s brand that we need robust, independent reporting. It enables us to know where we match up, what areas need more attention, and helps us figure out what we need to do about problem areas.

As the country’s population increases, its economy develops and lifestyles change, pressures on its natural resources grow. For example, there have been longstanding issues associated with dairy farming polluting rivers, referred to as ‘dirty dairying’, with at least 151 prosecutions over a four-year period from July 2008 to June 2012 involving 300 charges for unlawful discharges of dairy effluent.70 Regular and independent monitoring of the state of those resources is a first and vital step towards stopping, and hopefully reversing, further degradation.

(a) With the use of online data, search for evidence that the dairy industry in New Zealand is working to prevent ‘dirty dairying’.

(b) Is it possible for you to know the conditions under which the products you purchase are produced? Why?

(c) Is it possible for managers of a dairy cooperative, such as Fonterra, to know with certainty that their outsource partners comply with agreed-upon working conditions? Why?

(LO1 and 2)

            Sustainable management practices

In an Environmental Victoria audit, it was found that Australian supermarkets could save $41.6 million annually if ‘green bags’ were universally adopted. This audit was conducted at Leo’s Fine Foods in Kew, Victoria. It was conducted as a timed experiment; that is, clocking a checkout operator on the time taken to fill reusable green or single-use plastic shopping bags. The results are highlighted in the table below.

The results show that there was little difference in transaction times for single-use bags compared with reusable bags.  As a result of this experiment, Henty strongly suggests governments introduce a levy on single-use plastic bags to encourage further use of green bags.³⁸

Required

(a)     If you were designing/conducting this experimental process, what are some of the concerns might you have for results being considered representative of the true situation being investigated?

(b)     What other sustainable management practices might supermarkets employ to decrease waste?

            (LO4 and 5)

            Carbon footprint accounting

Consider the carbon footprint of an airline such as Qantas. Could an airline ever become carbon neutral or positive? Explain. What about a botanical garden? Discuss.

            (LO1)

      Sustainability disclosures; management accounting tools

Search the newspapers/web to find examples of Australian companies disclosing their sustainability practices using management accounting information or tools such as the balanced scorecard. Provide a report on your findings.

            (LO 1 and 4)

            Sustainability and classification

Using the following table, classify each sustainability cost according to their appropriate category (level 1–5).

(LO3 and 4)

            Externalities and sustainability

Read the management accounting case at the beginning of this chapter. Using Bank Australia as an example, list some of the positive externalities that might be achieved as a result of its operations. What are some of the negative externalities that could result from the banking operational activities?

(LO1 and 3)

Contingent Costs

List some costs that may be considered to be ‘contingent’ sustainability-related costs for the mining industry.

(LO4)

            Balanced scorecard indicators

Comment on how the inclusion of environmental and social indicators in a balanced scorecard might contribute to an organisation’s profitability.

Carbon trading

Required

(a)     Explain how carbon-trading might reduce greenhouse gas emissions.

(b)     How might the existence of carbon trading schemes affect the management accounting system within organisations?

            (LO 1 and 4)

14   Sustainability threats and opportunities

The World Coal Institute claims that coal provides over 26.5 per cent of global primary energy needs and generates over 41.5 per cent of the world’s electricity. Coal is one of the cheapest forms of fuel available on the planet. However, burning fuel produces carbon dioxide which contributes to excessive greenhouse gas emissions and global warming. Rather than change energy sources, Clean Coal Technologies (CCTs) have been promoted as a means of reducing emissions, reducing waste as well as increase the efficiency (or amount of energy) gained from coal.⁷²

Required

Referring to the information in this problem and drawing on comprehensive example 2, discuss some of the sustainability management threats and opportunities for the future of Australian coal producers.

(LO1, 2, 3, 4 and 5)

Briefly comment on how legislation and societal expectations could influence the scope of sustainability management practice within organisations.

           What are some of the factors that managers should consider when implementing sustainability practices in their organisations?

What are some of the sustainability-related considerations that managers should acknowledge when evaluating their organisation’s value chain?

What key measures should be included in a sustainability balanced       scorecard?

What are the potential benefits from developing an input-output chart of accounts?

Discuss the importance of ethical decision-making in a sustainability management accounting framework.

What types of management decisions can benefit through using sustainability cost information?

            Outline the relationship between the scope (levels) of costs and full cost accounting.

Will organisational efforts towards sustainability result in reduced organisational profits?

Why should the economic, environmental and cultural dimensions be managed in unison?

Is sustainability achievable in all organisations regardless of their           operating activities?