George Dummar
Professor McDonald
Managerial Accounting
4 March 2014
Ethics Case

1) Shaving 5% off the estimated direct labor hours in the base for the predetermined overhead rate will usually result in a big boost in net operating income at the end of the fiscal year by increasing the overhead rate by 5%. As we know, decreasing the denominator of a fraction will consequently result in an increase to the overall value of a fraction (or percentage). Also, at the end of the year, actual overhead will be less than applied overhead, which results in a favorable overhead variance. This will reduce the cost of goods sold (absorbed by actual direct labor hours), which in turn will increase the gross margin and net income. The company’s overall value via overhead variance will exceed their efficiency. 2) Cristin Madsen should not go along with the general manager’s request. It is simply unethical and will produce a dishonest net income. She should tell her manager that his requests can be deemed illegal, and could even result in jail time. It will result in a loss of both of their jobs and some hefty fines at the very least; all due to the fact that both of their names are attached to the decision. 3) Cristin would violate the competence, integrity, and credibility sections of the IMA’s standards if she followed the general manager’s request. 4) I would honestly tell Cristin to go ahead and seek a new employer. People who are willing to break the rules in order to gain personal benefit are not only bad role models, but they also are typically poor managers. It will come back to bite her in the end if she sticks with her job here.