The suggestion of the accountant to increase the production despite the fall in demand to increase the reported profit is sensible to some extent as it will prevent the share price from declining and the risk of losing the job is also eliminated for the time being. If the company is practicing absorption costing in preparing the financial statements, this could be the suitable measure for showing increased profit by simply increasing the production even if the sales remain constant. In absorption costing, the fixed cost associated with the production of goods is attributable to cost of goods sold and inventory. Even if we fail to increase the sales, the large amount of fixed costs is associated with inventory that reduces the actual expenses reported in the income statement.
For example:
A company is producing 10,000 units of products with fixed costs of Rs.100,000. The fixed cost per unit will be Rs.10 and variable costs of Rs.12 per unit. If the selling price per unit is Rs. 25, the gross profit of the company can be calculated as:
Sales Revenue(25*10,000) =250,000
Less: Fixed Costs (10*10,000 ) =100,000
Less: Variable Costs (12*10,000) =120,000
Gross Profit =30,000
If the company decides to utilize its full capacity and produce 15,000 units though the sales is 10,000, the fixed cost per unit will reduce to Rs.6.67 per unit and the gross profit will change as:
Sales Revenue(25*10,000) =250,000
Less: Fixed Costs (6.67*10,000 ) = 66,700
Less: Variable Costs (12*10,000) = 120,000
Gross Profit =63,300
We can see that as per the accountant’s advice, the cost of goods sold is lowered increasing the value of inventory. This results in increased gross profit that will eventually lead to higher net income. However, the income statement is fabricated and the reduced/slowed sales will be viewed as lower costs and higher profit(Ozyasar, 2018). It will give the hint that company is doing well when it is not being able to pick up the sales.
Despite some of these ethical issues, I will go with the accountant’s suggestion. It will also provide me with the time to think about the new ways to increase sales. As suggested by the marketing manager, offering discounts may not lead to increased sales and the increase in discount will also decrease the net profit as it is treated as expenses. Along with implementing the accountant’s suggestion, I will invest my time in finding the reasons for lowered demand and looking for ways to reduce operational costs, build personal relationship with customers, make distribution more effective and incorporate the suggestions from customers to increase the profit by increasing sales in long run (Edmunds, 2018).
References
Edmunds, S. A. (2018, June 26). How to Increase Sales & Revenue: 5 Essential Strategies. Retrieved from Chron: smallbusiness.chron.com/increase-s...
The suggestion of the accountant to increase the production despite the fall in demand to increase the reported profit is sensible to some extent as it will prevent the share price from declining and the risk of losing the job is also eliminated for the time being. If the company is practicing absorption costing in preparing the financial statements, this could be the suitable measure for showing increased profit by simply increasing the production even if the sales remain constant. In absorption costing, the fixed cost associated with the production of goods is attributable to cost of goods sold and inventory. Even if we fail to increase the sales, the large amount of fixed costs is associated with inventory that reduces the actual expenses reported in the income statement.
For example:
A company is producing 10,000 units of products with fixed costs of Rs.100,000. The fixed cost per unit will be Rs.10 and variable costs of Rs.12 per unit. If the selling price per unit is Rs. 25, the gross profit of the company can be calculated as:
Sales Revenue(25*10,000) =250,000
Less: Fixed Costs (10*10,000 ) =100,000
Less: Variable Costs (12*10,000) =120,000
Gross Profit =30,000
If the company decides to utilize its full capacity and produce 15,000 units though the sales is 10,000, the fixed cost per unit will reduce to Rs.6.67 per unit and the gross profit will change as:
Sales Revenue(25*10,000) =250,000
Less: Fixed Costs (6.67*10,000 ) = 66,700
Less: Variable Costs (12*10,000) = 120,000
Gross Profit =63,300
We can see that as per the accountant’s advice, the cost of goods sold is lowered increasing the value of inventory. This results in increased gross profit that will eventually lead to higher net income. However, the income statement is fabricated and the reduced/slowed sales will be viewed as lower costs and higher profit(Ozyasar, 2018). It will give the hint that company is doing well when it is not being able to pick up the sales.
Despite some of these ethical issues, I will go with the accountant’s suggestion. It will also provide me with the time to think about the new ways to increase sales. As suggested by the marketing manager, offering discounts may not lead to increased sales and the increase in discount will also decrease the net profit as it is treated as expenses. Along with implementing the accountant’s suggestion, I will invest my time in finding the reasons for lowered demand and looking for ways to reduce operational costs, build personal relationship with customers, make distribution more effective and incorporate the suggestions from customers to increase the profit by increasing sales in long run (Edmunds, 2018).
References
Edmunds, S. A. (2018, June 26). How to Increase Sales & Revenue: 5 Essential Strategies. Retrieved from Chron: smallbusiness.chron.com/increase-s...
Ozyasar, H. (2018, September). The Influence of Inventory Changes on Gross Profit. Retrieved from Chron: smallbusiness.chron.com/influence-...