►

·.cH APT ER2

THE PRO FESS IONA L ·ENVIRONMENT

Of COS T MANAGEMENT

ORGANIZATION ~TRUCTURE AND THE MANAGEMENT

ACCOUNTANT

Many of the activities constituting the ·field of management accounting are

interrelated and thus must be coordinated, . ranked an~ implemented by the
management accountant in such a fashion as to meet the objectives of the
organization as perceived by him or her. A major function of the management
.accountant is that of tailoring the application of the process tQ"the organization so
that the organiz ation's objectives, short-term and long. .term 1 are achieved
effectively.

Management accounting is intended to include persons involved in such .functions

as controllership, treasury, financial analysis, planning, and budgeting, cost
accounting, internal audit, systems, and general accounting. Management 1

accountants thus may have titles as controller, treasurer, budget analyst, cost
analyst, and accountant, among others.

The accounting function is usually "siaff.' , with responsibility for providing line
managers and also other staff managers, with specialized services. This includes
advice and help in the areas of budgeting, controlling, pricing and special
decisions .

Line authority is the authority to command action or give on;lers to subordinates.

Line managers are directly responsible for attain in~ the obj~ctives of the business
firm as efficiently as possible. Sales and production managers typically have line·
authority. Staff authority is the authority to advise but notcom mand others; it ·is
exercised laterally or upward . Staff managers give support, advice and service to
line departments. Examples of staff authority are found in personnel, purchasing,
engineering and accounting.

Except for exercising line authority over his department, the chief accounting
officer usually the controller generally fills the staff role in his company as
ves. Theoretically,
. roles of sales and production executi
contrasted with the line
 22 ' Chapter 2

the controller transmits the best accounting procedures to be followed by th e line

people to the President . who will communicate such th rough a m~nual of.
·
·mstruct1ons. · however
In practice · the contro II er h0 Ids delegated authority .from
top line ·
· management • · ' · peop Ie on t10 w to apply these procedures ·
to direct the hne
I
I .
I . 1s
Th 1s ·
· known as functional authonty • w h"10 h 1s· the right. to . command
· action ,
I
laterally or downwar~with regard to a specific function or specialty. .

THE CHIEF FINANCIAL OFFICER AND THE CONTROLLE R

The chief financi~l officer (CFO) - also called the finance d_irector in_ many
countries - is the executive responsible for overseeing the financial ~per~twns of
an organization. 'The i:esponsibilities of the CFO vary among orgarnzat,ons, but
they usually include the followirig areas:
• Controllershtp _ includes providing financial information for reports to
managers and reports to shareholders and overseeing the overall
operations of the accounting system.
• Treasury - includes banking ·and short- and long-term financing,
t
investments, and management of cash. _
• Risk management - includes managing the financial risk of interest-rate
and exchange-rate changes and derivatives ·management
• Taxation - includes income taxes, sales taxes, and international tax
planning.
• Internal audit - includes reviewing and analyzing financial and other
records to attest to the integrity of~he organization's financial reports and
· to adherence to its policies and procedures.

In some organizations, the CFO is also responsible for information systems. In

other organizations, an officer of equivalent rank to the CFO - called the chief
information officer - is responsible for information systems.

The controller (also called the chief accounting officer) is the financial executive
primarily responsible for management accounting and financial accounting. This
book focuses on the controller as the chief management accounting executive.
Modern controllers do not do any controlling in terms of line authority except over
their own departments. Y ~t, the m?dern concept of controllership maintains that
the controller does control m a special sense. That is, by reporting and interpreting
relevant data (problem-solvin g and attention-directing roles), the control1er exerts
a force or influence that impels management toward making better-informed
decisions.
\

\
•
The Professional Environment of Cost Managemenl 23

Figure 2-1 is an illustrative organization chart of the CFO and the corporate
controller of an apparel company •

Figure 2-1: Reporting Relationships for the CFO and the Corporate
Controller
,.

. Chairman ~ -
Chief Executive Officer· Board of Directors
(CEO)
I
President
Chief Operating Officer
(CqO)
1
Chief Financial Officer
· . (CFO)
l "·
--
I I
Controller Treasurer

The Controller as the Top Management Accountant

Controllership is the practice of the established science of control which is the

process by which management assures itself that the resources are procured and
utilized according to plans in order to achieve the company's objectives.

In most organizations, the top managerial accounting position is held by :he -_

controller. The controller provides reports for planning and eval~ating company
activities (e.g., budgets and performance reports) and provides the infonm1tion
needed to make management decisions (e.g., decisions related to constru(;tion af a
new factory or decisions related to adding or dropping a product). The controller
also has responsibility for all financial accounting reports and tax fi li:·;2,s with the
Bureau of Internal Revenue and other taxing agencies, as well as .:c oni inating the
activities of the firm 's external auditors.
 l• C/r~pte r] _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ ___

A ,· • . . .. hart for the contro ller's office ·

s1mpl1fied illustration of the organ11,4t1on c . . to the contro ller . is
is cost
shown in Fl1ure 2•2 . Note that one of the areas repor1!ng m anies hav
p . e ~u~h a
accoun1ing. Most medium-siz;ed and large manufactu_ring co
dectS, ons
department.. Cost accoun tants estimate costs to facilitate manag ement
and develo p cost inform ation for purposes of vaJuing invent ory.
a high~
The contro ller is an integral part of the top management. team . If one wants
level ~ in manag ement accounting, he/she w1ll need . not only
str~ng
These skills
acc:.ounting skills but also skills required of all high-level ex~c~ tives.
l skills
mdud c excell ent written and oral communication skills, sohd interp ersona
and a deep knowl edge of the industry in which the finn compe tes.
s office
The c.ontroller' s author ity is basically staff author ity in that the contro ller'
ment,
gives advice and servic e to other department5. However. in his own depart
that
he hu line author ity. l.n the modem concep t of contro llershi p. it is maint ained
reting
the contro ller docs contro l .in ,a special sense. Thar is., by report ing and interp
ement
releva nt d~ the c.ontroUer exerts a force or innuen cc chat impel s manag
toward log,ical decisi ons oons1S lent "itb obJedi \C~S

F,,.,. . ?-l: A Typia lf Orcaa tatio• Cbn SIMnwiac ttac- Fu.ac tions of the
Coa t.rolk-r

I
[

L
s~
De~
I
 •
. The Professional Environment of Cost Management 25 ·
IS
)St _Basic Functions of Controllersbip
1 a
,ns The basic principal functional responsibilities and activities of controllership may
be categorized as foliows: ·

h- 1. Planning. Establish and maintain an integrated plan of

operation
1g consiste nt with the compan y's goals and objectiv~s, both short and long
\Is · term, analyzed and revised, as required, communicated to all levels of
Is manage ment, with appropriate systems and procedures installed. -
2. Control. Develop and revise standards against which to measure
·
perform ance and provide guidance and .assistance to other members of
:e manage ment in insuring conformance of actual results to standards.
t· 3. Reporting. Prep~re, analyze, an(:f interpret financial results for utilizati
on
' by manage ment in the decision-making process, evaluate the data with
:1.t
g .reference to company and unit objectives; prepare and file external reports
1t
as . required to sati'sfy .government regulatory bodies, shareholders,
fin~cia l institution, customers, and the general public.
4. Accounting. D~sign, establish, and maintain general and cost accounting
systems at all company levels, including corporate, divisional, plant, and
e
unit to properly record all financial transactions in the books of accounts
· and records in accordance. with sound accounting principles with adequate
internal control.
5. Other Primary Responsibilities. Manage and supervise such functions as
taxes, including interface with the respective taxing authorities and agents;
maintain appropriate relationships with . internal and external auditors;
develop and maintain systems and procedures; develop record retention
programs; supervise assigned treasury functions; institute investor and
financial publ_ic relations programs; office management; and direct other ·
assigne d functions.

As circums tances warrant, there may be many deviations from the basic functions
just describe d. It should be pointed out that the controll er's efforts should not be
diluted and render him less effective by assigning to him unrelated functions of an
operational nature. The financial planning and control functions are too important
to the success of the business enterprise to burden the controller with activities that
others can perform.

)
 :__----- -------------
~2~6-~C:!_h~a'E_p!!_te::_r~2~ _ _ _ _ _ _ __ _

Qua lific atio ns of the Con troll er

inclu?e: d fi .
The qual ifica tion s of an effective controller would g_ an . m~•~ ce with an
1. · An exce llent technical foundation in accountm .
untmg_ p_nncip es.
, unde rstan ding and thorough knowledge of acco nd cont rol.
2. An unde rstan ding of the principles of planning: orga nizm g, a
. of the ·m·d ust ry 1·n whic h the com pany com petes
• ·
. 3 . A gene ral unde rstan d mg
and the social econ omic and fpolit ical forces mvolv~d. .
tech no log·•es,
.4 . A thor ough unde ·' ·' h
rstan dmg o t e com pa , .
ny inclu dmg . its. .
and envi ronm ent.
prod ucts , policies; objectives, history, orga niza tion,
man agem ent an~ a basic
5. The abili ty to com mun icate with · all levels of
relat ed. to engm eerin g,
unde rstan ding of the qther functional prob lems
~ark eti~ g. .
prod uctio n, procurement, industrial relations, and
or m mak ing mformative
6. The abili ty to expr ess ideas clearly in writi ng
pres enta tions . · ·
7. . The abili ty to moti vate othe rs to achieve positive actio ~ and resu lts.

be able to lay out the assigned

The cont rolle r m·a y have the technical capability and
, but he mus t also have integrity
task s as well as supe rvise and direct his personnel
is to succeed.. · He mus t be fair, reas onab le
. com nmn icate if he
and the abili ty to
)
. . .
gnized for the impo rtan ce of the
. and sinc ere with all conc erne d if he is to be reco
cont rolle rship function.
able to work with peop le at all
As in any exec utiv t position, the .controller must be
of othe rs, and have the
leve ls, have resp ect for the ideas and opinions
·
reso urce fuln ess, to mee t all challenges.-
TRE ASU RER
THE CID EF FIN ANC IAL OFFICER AND THE
of firm, the role of finance is
Alth ough orga niza tiona l structures vary from firm
) or the Vice President.,.Finance
assig ned to the Chie f of Financial Officer (CFO
who repo rts to the President.
are the Trea sure r and the
The finan cial vice -pre side nt's key subordinates
ely dealt with the role of the c on t ro II er 1·n the
. book has extensiv
. er. This
Con troll
prev ious secti on.
 #

The Professional Environment of Cost Management 27

Treasurership
1.

ance ,with an Treasurership is concerned with the acquisition, financing and management of
iples, assets of a business concern to maximize the wealth of the firms for its owners.
and control.
any competes In addition to the position of the controller, many companies have a position called
treasurer. .The treasurer has · custody of cash and funds invested in various
technologies, marketable securities. In addition to money management duties, the treasurer is
ironment generaHy responsible for maintaining relationships with investors, banks, and
t and a basic other creditors. Thus, the treasurer plays a major role in managing cash and
engineering, marketable securities, preparing cash forecasts and obtaining financing from banks
and other lenders; Both the controller and the tr.easurer report to the chieffinancial
officer (CFO) who is the senior executive responsible for both accounting and
.,, informative financial operations .
results.
ln most firms the treasurer has the following responsibilities:
t the assigned 1. Funds Procurement
1ave integrity This involves raisipg of funds in accordance with the firms planned capital
r, reasonable, structure. This responsibility may require negotiating for loans, short-term
>rtance of the or long-term, issuing· equity of debt instruments at the best . terms and
. conditions pos~ible.

1 people at all 2. Banking and Custody of Funds

:1 d have the This involves direct management of cash and cash equivalents and
maintenance of good relations with banks and other non-:-bank institution.
3. Investment of Funds
This involves management of the company's placements and securities or '
purchase of debt or equity instruments such as ordinary or preference
of fin ance is shares in other corporate entities. This responsibility also includes analysis
1dent-Finance of decisions related to investment in property, plant and equipment

4. Operating Responsibilities related to

1rer and the (a) Credit and Collection
1troller in the (b) Inventory Management
(c) Corporate pension and retirement fund
(d) Investor Relations
(e) Insurance
(f) Compliance with legal and regulatory provisions relating to funds
procurement, use and distribution as well as coordination of the
· finance function with accounting function.
 28 Chapter 2

ETHICA LSTAND ARDSFO RMANA GEMEN TACCOU NTANTS

In recent years, many concerns have been raised regarding e~hical behavior in
th1
business and in public life. Allegations and scandals of une ca~ con~uct ·have
0
been directed toward managers in virtually all segments . ~ society, mcluding
th0
governme nt, business, charitable organizations, and ev~n re_h~ion. Al ugh these ,
allegation s and scandals have received a lot of attention, it is do~btful that they
th
represent a wholesale breakdown of the moral fiber of e nation: After all,
hundteds of millions of transactions are conducted every day that remam untainted
Neverthel ess, it is important to have an appreciation of what is an~ is no~
acceptabl e behavior in business and why. Fortunately, the Institute of
Managem ent Accountan ts (IMA) ·o f the United-States has developed a very useful
ethical code called the Standar,ds of Ethical Conduct for Practition ers of
Managem ent Accountin g.and Financial Management. Even though the standards
1

were specifical ly developed for management accountants, they have inuch broader
applicatio n.

Code of Conduct ro·r-Management .Accountants

' .
The Institute of Managem ent Accountants (IMA)-'issued the Standards of Ethical
Conduct for Practition ers of Management Accounting and .F inancial Management.
These standards are presented in Figure 2-3. There are two parts to the standards.
The first part provides general guidelines ' for ethica, be_h avior. In a nutshell, the
managem ent accountan t has ethical responsibilities in four broad areas namely
'
I . to maintain a high level of professional competen ce,
2. to treat sensitive matt~rs with confidentiality,
3. to maintain persona) integrity, and
4. to· be objective in all disclosing.

The second part of the standards gives specific guidance concernin g what should :
be done if an individual finds evidence of ethical miscondu ct within an
organizat ion.

The ethical standards provide sound, practical advice for managem ent account,mts .
and_ managers . They req~ire professional behavior, especially in avoiding ~onflicts
of mterest. · They reqmre management accountan ts to bring bad news to the
attention of their superviso rs, and to work co~petent ly.
 ►
The PrQfessional Environment ofCost Management 29
rs
Most of the rules in the· ethical standards are motivated by a very practical
,ehavior in consideration - if these rules were not genera~ly followed in business, then the
nduct have economy could ~ome to a halt. The following are examples of the consequences
. incJuding of not abiding by the standards:. ··
ough these 1. Suppose employees could not be trusted with confidential information.
11 that they Top .managers would therefore be reluctant to distribute confidential
After all, information within the company. This could result to decisions being
untainted. made. based on incomplete information and could lead to deterioration of
md is not operations. ·
1stitute of
ery usefuJ
1 2. Suppose employees accept bribes from .suppliers. Then contr~cts would
tioners of tend to go to suppliers who pay the highest bribe rather than to the most
standards ' competent suppliers. Would you like to fly in an airplane whose wings
were made by the subcontractor who was willing to pay the highest bribe
)h broader ·
to a purchasing agent?

3. Suppose the CEOs or presidents ofcompanies routinely lied in their annual

reports to shareholders and grossly distorted financial statements. If the .
basic,integrity of the company's financial statement could not be relied on,
of EthicaJ investors and creditors would have ·little basis for making informed
1agement. decisions. Rational investors would suspect the worst and would pay less
,tandards. for securities issued by companies. As a result, less funds would be
tsheJI, the available for productive investments and many firms might be unable to
,amely raise any funds at all. This ultimately, would lead to slower economic
growth, fewer goods and services, and higher prices .

. As these examples suggest, if ethical standards were not generally adhered to, there
would be undesirable consequences for everyone. Following ethical rules such as
those in the Standards of Ethical Conduc~ for Practitioners of Management
Accounting and Financial Management is not just a matter of being "nice"; 1t is
absolutely essential for the smooth functioning of an advan_ced market economy.
at should
1ithin an

;ountants
conflicts
1s to the
 30 Chapte r 2 _ --------- -_
F" ·
•gure 2-3: Standa rds of Ethical Con d uc t r,O i- Practit ioners of Man agerne
·
• . • I Manag ement 11 t
Accoun tmg and Fmanc .a

Practitioners of management accounting and fi~anciat management have an obli~~i_ on

to the public, their profession, the organization tney ~~rve, an~ th e~sel_ves, to ma1~tain
the highest standards of ethic.al conduct. In recogrntio~ of th1 s o~hgation, ~he Institute
of Management Accountants has promulgated the follo~ing stand ard s of eth1 cal conduct
for practitioners of management accounting and fi~ancial ~a~agement. Ad~er~nce to
these standards, both domestically and internationally, is integral to ach,ev_ing the
Objectives of Management Accounting . Practitioners of management accounting and
financial management shall not commit acts contrary to t~ese st a~da_ rd s nor shall they
condone the commission of such acts by others within their organizations.

Competence. Practitioners of management accounting and financial management

have a responsibility to: · - .·
• Maintain an appropriate level of professional competence by ongoing development
of their knowledge and 'skills. _
•. Perform their professional duties iii accordance with relevant laws, regulations, and
· technicai standards. ·
• Prepare complete and clear reports and rec0mmendations after appropriate analysis
of relevant and reliable information.

Confidentiality. Practitioners of management accounting and financial management

have a responsibility to:
• Refrain from disclosing confidential information acquired in the course of their work
except when authorized, unless legally obligated to do so.
• Inform subordinates as appropriate regarding · the confidentiality of information
acquired in the course of their work and monitor their activities to assure the
· maintenance of that confidentiality .
• · Refrain from using ·or appearing to ~se confidential information acquired in the course
of their work for unethical or illegal advantage either personally or through third
parties.

Integrity. Practitioners of management accounting and financial management have a

responsibility to:
• Avoid actual or apparent conflicts of interest and advise all appropriate parties of any
potential conflict.
• Refrain from engaging in any activity that would prejudice their ability to carry out their
duties ethically. - - _
• Refuse any gift, favor, or hospitality that would influence or would appear to influence
their actior:is .
 The Professional Environment a/Cost Management 31
1agement
• Refrain from either actively or passively subverting the attainment of the
organization 1s legitimate and ethical objectives.
1bligation • Recognize and communicate professional limitations or other constraints that would
maintain . _preclude responsibility judgment or successful performance of an activity.
Institute • Communicate unfavorable as well as favorable information and professional
conduct · judgments or opinions.
rence to Refrain from engaging in or supporting any activity that would discredit the profession.
ting the
ting and Objectivity. Practitioners of management accounting and financial management have
1all they a responsibility to:
Communicate information fairly and objectively.
• Disclose fully all relevant information that could reasonably be expected to influence
an intended user's understanding of the reports, comn1ents, and recommendations
gement
presented.
)pment · Resolution of Ethical Conflict. · In applying the standards of ethical conduct,
practitioners of manager:nent accounting and financial management may encounter
1s, and problems in identifying unethical behavi~x or in resolving an ethical conflict. When faced
with significant ethical issues, p~actitioners of management accounting ·and financial
nalysis ma~agement should follow the established policies of the organization bearing on the .
resolution of such conflict. If these policies do not resolve the ethical conflict, such
practitioner should consider the following courses of action:
ement • Discuss such problems with the immediate superior except when it appears that the
superior is involved, in which case the problem should be presented initially to the
r work next higher managerial level. If a satisfactory resolution cannot be achieved when
the problem is initially presented, submit the issues to the next higher managerial
nation level.
• If the immediate superior is the chief executive officer, or equivalent, the acceptable
·e the
reviewing authority may be a group such as the audit committee, executive
committee, board of directors, board of trustees, or owners. Contact with levels
ourse above the immediate superior should be initiated only with the superior's knowledge,
1third assuming the superior is not involved. Except where legally prescribed,
communication of such problems to authorities or individuals not employed or
engaged by the organization is not considered appropriate.
ave a • Clarify relevant ·ethical issues by confidential discussion with an objective advisor
(e.g., IMA Ethics Counseling Service) to obtain a better understanding .of possible
,f any courses of action. .
• Consult your own attorney as to legal obligations a~d rights concerning the ethical
'. their conflict.
• If the ethical conflict still exists after exhausting all levels of internal review, there may
ence be no other recourse on significant matters than to resign from the organization and
32 Chapt er 2
. t8 ~
to ·submit an infonn ative memo randum to an appropna rep,:esentati~e of th
th8 th rna;
organization. After resignation, depen~ing on the nature_of e 'cal conflict, it
also be appropriate to notify other parties.
* Institute of Management Accountants, formerly_ N~tional Association .of
Accountants,
nting
$tatements on Management Accounting: ObJecf,ves of ~anagement Accou
_ '
Statement No. 1B, New York, NY, June 17, 1982 as revised in 1997.

COM P ANY COD E OF CONDUCT

Ethic al stand ards serve a very important practical ~unction in an advanc~d market
st rd s, ~ater ial living
econo my. Witho ut widespread adherence to ethical an~a th
importance of
stand ards would fal I. A former president of CMA emph asizes -e
ethics in business:
mers
"Emp loyee s like to work for a company that they can _trust: Custo
to
like to deal with an ethically reliable business. Suppliers !t~e to sell
more
. firms with which they can have a r;eal partnership. Comm umtie s ~re
with
likely to coope rate with organizations th~t deal honestly and fairly
·isI to function effectively, all of the
them. If the business community - - -
playe rs need to act ethica lly."

asis on short-
It is unfor tunate though, that some companies place s_o much emph
is to act
term profit s that may make it seem like the only way to get ahead
uneth ically .
s with one or
Those who engag e in unethical behavior often justify their action
more of the following reasons:
(1) the organization expects unethical behavior,
(2) every one else is unethical, and/or

(3) behav ing unethically is the only way to get ahead.

anies have '"

To count er the first justification for, unethical behavior, many comp
broad-based
ad9pt ed formal ethical codes ofcon duct. These codes are gener ally
customers, its
statem ents of a comp any ~s responsibilities to its employees, · its
s give broad
suppl iers and the community ip which the ~ompany operates. Code
sugge st proper•
guide lines rather _than that spell out specific do.' s and don 'ts or
can create
behav ior in a specif ic situation. Companies with a strong code of ethics
may win on
stron ~ custo~ er_ an~ employee loyalty. While lia~s and cheat s
for the long
occas ion, thei~ victqn es are often short-term_. Companies in busin ess
y. · ·
term find that 1t pays to treat all of their constituent~ honestly and loyalt
►

The Professional Environment of Cost Management 33

TYPICAL ETHICAL CHALLENGES

Ethical issues can confront management accountants in many ways. Here are two
examples:

• Case A . 'Roger Cruz, a management accountant, knows that reporting a

loss for a software division will result in yet another serie.s of layoffs, and
has concerns ,about the commercial potential of software for which R&D
costs are currently being capitalized as an asset rather than being shown as
an expense for internal reporting purposes. The divi$ion manager argues
that the new product will be successful and profitable but presents little .
evidence to support her argument. The last two products from this division
have been unsuccessful . The management accountant has many friends in
the division and wants to avoid a personal confrontation with the division
manager.

• Case B: A packaging supplier, bidding for a new contract, offers the

management accountant of the purchasing company an all-expense paid
weekend to the Boracay Resort. The supplier does not mention the new
contract when giving the invitation. The accountant is not a personal
friend of the suppfier. He knows cost issues are critical in approv ing the
new contract and is concerned that the supplier will ask for details about
bids by competing packaging companies.

· In both cases, the management accountant is faced with an ethical dilemma. Case
A involves competence, objectivity, and integrity. The management accountant
should request that the division manager provide 'credible evidence that the new
product is commercially viable. If the manager does not provide such evidence,
expensing R&D costs in the current period is appropri~te. Case 8 in~olves
confidentiality and integrity. Ethical issues are not always clear-cut. The supplier
in Case 8 may have no intention of raising issues associated with the bid . .
However, the appearance of a conflict of interest in Case B is sufficient for many
companies to prohibit employees from accepting "favors" from suppliers. Figure
· 2-3 includes the IMA 's · guidance on "Resolution of Ethical Conflict." The
accountant in Case 8 should discuss the invitation with his immediate supervisor.
If the visit is approved, the supplier should be informed that the invitation has been
officially approved subject to his following corporate policy (which includes the
confidentiality of information).
 . · EVEL
, 34 Chapte r 2 RNATIONAL L ·
TIIEJNTE . .
CODE S OF CONDUCT ON untant s (IF AC) 10 which the CIA. Since c
·on of. Acco · .J 1· · Eth·1cs for accoun tant is
. 1 Federat1 d the "Gu rue mes on
all profess ional in the accour
In July 1990, the . lnterna t10;; is a membe r, issue tivities of
th e ;~ethe r they are practic ing as strong ties tc
Philipp ines throug h the Pl ~ which govern s
·Id· regardl ess of . or emplo yed as internal Audito rs (ll1
Professional Accountants th e ~ 0 \ 'govern ment s~rvice ts in matter s dealin g With status of Ce.
accoun tants _throug hout 1 AC'
indepe ndent CPAs, employ e .' . h" I require men examin ation
accoun tants . In additio n to outl1111 ng et I~~ confide ntiality , the I_F s code also numbe r ofy<
s relatin g _to taxes, fees
com etence objectivity, independence, a! ilities in matter
mome and cr~ss-
s INSTITUTJ
out1fi1es the, accoun tant_'s_e_thical resp~ni~~~io~ , the handli ng of
and commi ssions, advert1smg and soltc . ·ties are in volved , the IF AC ethical
r than the ethical Manag emen
border activiti es . Where cross-b order act1v'. ments are stricte d
. d ·r
I these require
k ·s being perfor me · more time
require ments must be followe · w hich the wor 1 recordi ng a
·
require mei1ts of the country 111
· . · 1 Regula tion Comm ission approv ed Accoun tanti
_ _ . IA .
O f .the Professof 1ona s1ona ccoun tants m United Stat(
The Board of Accou ntancy Ethics for Profes
. accoun tants
the implem entatio n of the Revise d Code
Januar y 1, 2016. (CMA) exa1
· the Philipp ines effecti ve
in the CM,
profess iona
INTER NATIO NAL CERTIFIC~TIONS four parts:
.fi . . ble to manag ement
. accoun tants are as follow s: Report ing;
The three cert1 1cat1on s ava1 1a Analys is a-
• Certifi cate of Manag ement Accoun ting (CMA ) . (CFM) exa
• Certifi cate in Public Accoun ting (CPA) · the CMA e
• Certifi cate in ..Interna l Auditin g (CIA) Report ing :
also promu
the rigorou s
CMA. A Certifi ed Manag ement Accou ntant is one who has passed in the previ
and . partici pates in ~
qualify ing examin ation , has met an experie nce require ment,
grante d by the Institu te The lnstiri.r
contin uing educat ions. The CMA Certifi cate is
publish es 1
Manag ement Accou ntants (lMA).
conduc ted
alifica tion accoun tant
CPA. A Certifi ed Public Accouf!tant is one who has met the pre-qu world. Mc
require ments, passed the CPA licensu re exami nation s given by the
educat i?nal exam are ii
all other legal and
Profess 10nal Re~ula tory Board of ~ccoun tancy and has satisfi ed the design;
respon sibilit y is
regula t~ry require ments of a ~ubhc accoun tant. The CPAs main profess ion
ation contai n in the ·
to provid e a~sura nce concer nmg the reliabil ity of the inform examinatic
firm ' s financ ial statem ents.
 35
The Professi onal Environ me11I o/Cost Manage m ent

ma~ag e"'.enl
CIA- Since one of the management control responsibilities of the
e systems to detect and preven t erro, s and fraud
accountant is to develop effectiv
commo n for the manage ment accoun tant to have
in the accounting records , it is
IfAC) in which the strong ties to the control-oriente d organiz ation such as_ the Institut e of ln_tern al
defines on Ethics for Interna l Auditin g ( C IA ). To attain the
Auditors (IIA) granting Certification in
of all professional n~1ve
status of Certifie d Interna l Audito r an individual mu st pass a co mprehe
ey are practi_cing as the require d
examination designed to ensure technical competence and have
nploy~d· as internal
natters dealing with number of years of work experie nce.
e IfAC's code also
1
Jating to taxes, fees INSTITUTE OF MANA GEME NT ACCO UNT ANTS (IMA)
f moriies and cross- spend
Management accountants have gained status in recent years as they now
i the If AC ethical ms of
more time analyzing a compan y ' s operati ons and less with the proble
:;er than the ethical ement
recording and comput ing costs of products. The Institut e of Manag
ned. principa l organiz ation of manag ement accoun tants in the
Accountants (IMA), the
ement
United States, has instituted a program to provide certific ations for manag
nmission approve d · The Certifie d Manag ement Accou ntant
accountants and financial . managers.
,nal Accountants in 1972. A listing of the require d subjec t areas
~CMA) examination was first given in
m the ~MA examin ation indicates the breadth of knowle dge
expect ed of the
professional manage1~ent a_ccountant. The examin ation consist s of the follow ing
four p~rts_: Economics, Fman~e , and Ma_nagement; Financ ial Accou nting and
and Decisi on
. Report1_ng, Manage ment Reportm g, Analys is and Behavi oral Issues;
re as follows : Manag ement
Analysis an~ ln:orma tion Sys_tems. The Certifie d in Financ ial
to
(CFM) examm~t10~ was ~rst given in 1996. The CFM examin ation is similar
1
with one .major differen ce·· · the Fina c ··a I A ccoun t·mg an d
11
R rt· examm
the CMA · at,on
• IMA
epo mg section 1s replaced with Corpor ate Financ ial Manag ement Th
ment accoun tants wi~h : d. e d
~lso prom~lgated a _code of ethics for manage , ts 1scusse
m the previou s section.
assed the rigorou s
.nd_participates in
The Institute of Manage ment Accoun tin (IMA) i . . . . .
by the Institu te the monthl y magazi ne Strat g . F ' s a profi~sS ional orga111 zat1on that
publish es egzc znance. Smee 1973 th IMA h
con d ucted a compre hensive examin ation to test t , e . . . as /
accoun tant must have to be success ful . he knowle dge a manag ement
pre-qualificatio n fast-cl~ anging busin~ ss
ons given by the world. M_ore than 3,000 individ uals tak:';h : ~~::l: x and
a~h year. Those who pass the
exam are issued a Certific ate in Mana ement .
all other legal and g and are proud to indicat e
1 responsibility is
the designa tion CMA on resume s anJ b . A<;count_m
t and
profe~sio~al membe rships in the IM~ma ~ss cards._ For de~ails on studen
on contain in the id for mfor01at1on on the CMA
exammat1on, visit the IMA Web site.
36 , ----
Chapt er 2
One of contri bution s of the IMA is the devel opment ofstandardlls of ed~hicaJ conduct
. • th members. can ca ,to . 1scuss eth tea)
t ·
· •
an d maint enanc e of an ethics hot1me a . l sta~dards'.
confl icts. One may also visit the IMA website to review these ethica
TAN ls
PHIL IPPIN E ASSOCIATION OF MANAGEMENT ACC OUN
(PAM A)
i
. P ~ ~-_was established in 972 as the Nati_onal Ass~ciation of Acco
untan ts CNAA)
Jt
w~s founded ·
Ph1hp pme Chapter, Inc·. It is affiliated with NAA m New Yo~k.
activi ties that
prima rily to provi de its members with educational and. profo ssi~n al
practi ces and methods. ,
suppl emen t in the knowledge of management accounting
nt relevant
Mont hly techn ical meetings, seminars and workshops are held to prese
t, privat e and• •
and curre nt topics by leading speakers from the gover nmen
nge of ideas
educa tional sectors. The open foru,n provides the nerve for th~ ex~ha
of technical
and exper ience s amon g the participants' and the speakers. · Pubhc at1on
ers.
mater ials is also part. of the Association's efforts to servic e its memb
Philippines
To· propa gate and p~ofessionalize Management Acco unting in the
PAM A condu cts jhe C~rtificate in · Management Acco untin g
(CMA ) Progr a~
Mana geme nt.
~hrough its contin uing education . arm, the 'Philippine Institu te of
·
Acco untin g (PIM A). Basic objectives of the program are:
ssion by.
I. : o e_sta_blish. management accounting as a recogni~~d profe
lying
1dent1fymg the role of the mana~~ment acco~ ntant ·and the under
by which such
body of _knowledge, and by outlmmg a course of study
knowle<;ige can be acquired.
' .
2. To foster higher educ~tional standards in the field of management
accou nting.
objective ·
3. To assist employees, .educators and students by ~stab lishin g an
of
measu re of an indiv!duals' knowledge and comp etenc e in the field
mana geme nt accounting.

c.i) r{~ ronribH r/~ur·~Ojfi AJmr 1~

1
J

7h ~,.d f\ l )~ b 1-t}' tv \ ~r1I -~ >'\dll J

1 .
utt r/vi"-/I.At. J~•~pi1 11 )
U. Lvil /\ r 1 D _

I~ I
I r--L Ji' '~II\.- t,. ,J\ ~ 16{{ ~)7\J1
~,A~;~ bv~~d
?t,Li,lf\ {1\1\J\~"l Vv1l 14f'-,
I I • I ./
- ~) 11ie CP J vt ~ei1·p ◄l
1'.I\ ~ r~~;}iJll \
tp 1,
' '

' ,I') fi1 (). (, (Af) ?i) t 'V✓ \ o/.

REVIEW QUESTIONS AND EXERCISES

Questions
fications available to ,·
,Name the three internationai professional certi
managementaccountant. 1 cerif·cl\k o{ Vt,t~ t/\r,., ,i,l~
ti ~ 1 CerM(~~ i~ Pvh(-~
t relevant for the ~(( ~~ On~I
What ty·pe of professional certification is mos
(-<-1 ~.fi iA:f If\
management accountant and why? \
.
Which is the most important function ofl11<1ina~ert, aryd why ? f h~u, ~J -AJ), I t";
~ICAin111u ('(_ /Y\Orl 1m f t1 1f\t1 t o ?" l}O r 1 '(O..- ll\ (U .11 1
IAM
.
What roles do man agen;ienraccountarJts perf
into an organization's
Where does the management accounting function fit
~M1(1'1 '~( "-¥6V llP1 (<, ~ ~ 1•\~~ r•l P"•~ .,, L ti,.( 1YJ()~ (('./,~(
structure?
, 1J ~J•J.' I l }L'J '1~ ) ~fui I ~ "1>i ?1 ( fff!i
6. What guidelines do management account~n s dse
ti
. KP't> ~~ l 1
,

nts? ' >-4111 i'> 'I~ ,...,,~., " ' / {

7. What ar~ the ethical respopsibilities of accounta
8. "Planning is really more vital than control." Do
you agree? Why? ~ t,:
t/111/1,ff\r-,
e." Do you agree? Why? f
9. "The controller is both a line and a staff executiv
accounting functions) of
10. Prepare an organiz.ation chart {highlighting the
s:
Bettina Company, whic' h .has the following position
'

a. VP, Sales m. General ledger bookkeeper

· b. Internal audit manager n. Performance analyst
o. Tax manager ·
c. Treasurer
d. Payroll clerk p. Cost accounting manager
e. General accounting manager q. Cost clerk
f. Accounts receivable clerk r. Billing clerk
g. Budget and standard cost analyst s. VP, finance
h. Controller t. Systems and EDP Manager
. 1. Cost systems analyst u. VP, production
J. Special studies manager v. Assistant manager
k. Assistant controller w. President
I. Accounts payable clerk
?
11 . How does a controller help "control" a company
management accounting.
12. Discuss the potential behavior implications of
~3~8-~C~h~ap:e_!!_le~rl_2~--------------------------

·Exercises

Exercise t ·(Problem Solving, Scorekeeping, and Attention Directing_)

For e~ch of the followina activities; identify the mai~ rot~ ilie_ accountant is
.
0
. k · g or attention directmg.
performmg- problem solving, score eepm , · .

I. Preparing a monthly statement of Australian sales for th e IBM, marketing·

vice president. .
2. lnterpreting differences betweei1 actual results and budgeted amounts on a
performance report for the Customer Warranty Department of General
Electric. · . . ·
3. Preparing a· schedule of depreciation for forklift trucks in the Receiving
Department ofa Hewlett-Packard plant in Scotland. . • .
4. Analyzing, for a Mitsubishi international m·a nufacturing manager, the
desirability o·f11avi'ng some auto parts made irt Korea.
5. Interpreting why a Birmingham distribution center did not adhere to its .
delivery costs budget. .
6. Explaining~ Xerox Shipping Department's performance report.
7. Preparing, for-the-manager of production control -of a U.S. steel plant, a
cost comparison of two computerized manufacturing control systems.
8. Preparing a scrap report for the Finishing Department of a Toyota parts
plant. · · ·
9 . · Preparing the budget for the Maintenance . Department bf Mount Sinai
Hospital.
10. Analyf'.ing, for a General Motors product designer, the impact on product
costs of some new headlight lamps. . .

Exercise 2 (Management Accounting Information System)

The items that follow are associated with a management account·mg

1
information system.

a. Repairing a defective part. .

b. Providing information for planning and control.
c. Designing a product. · .
d. Measuring the cost of design.
e. A budget
. that .shows how
. much should be spent on d es1gn
· activity.
· ·
f . U smg output mformatton to make a decision ·
g . U sage of materials. ·
 The Professional Environment oJCost Management 39

h. A report comparing the actual costs of quality with the expected costs of
quality.
1. Surveying customers to assess postpurchase costs.
J. lncurrence of postpurchase costs.
k. Costing out products.
I. Assigning the cost of labor to a product.
m. Report showing the cost of a product.
n. Measuring the cost of quality . ·

Required:
Classify the items into one of the following categories:
1. Inputs
2. Processes
3. Outputs
4. System objectives

Exercise 3 (Role of Management Accountants)

Managemen t accountants are actively involved in the process of managing the

entity. This process includes making sti::ategic, tactical, and operating
decisions while helping to coordinate the efforts of the entire organization. To
fulfill these objectives, the management accountant accepts certain
responsibilities that can be identified as ( 1) planning, (2) controlling, (3)
evaluating performance, (4) ensuring accountability of resources, and (5)
external reporting.

Required:
Describe each of these responsibilities of the management accountant and
identify examples of practices and techniques. (CMA Adapted)

Exercise 4 (Line Versus Staff)

The job responsibilities of two employees of Boots Manufacturing follow.

Jamie Reyes, Cost Accounting Manager. Jamie is responsible for measuring

and collecting costs associated with the manufacture of the garden hose
product line. She is also responsible for preparing periodic reports comparing
the actual costs with planned costs. These reports are provided to the
production line managers and the plant manager. Jamie helps explain and
interpret the reports.
 40 -----
. Cha p_ter 2
. · · Stephen is resp onsi ble fi
u ervi ses the line 0or the
. Step hen Santos, Production Manager. . J:Ie s p "bl fr , ."." rkers
man ufac ture of the high-quality garden hose
on;i bl e ~or seei ng tha;
help s deve lop the production schedule, and is respun a e or controlling
prod uctio n quotas are met. He is also held acco
i .
man ufac turin g costs.
· .
Requ ired : exp lam your reas ons.
Iden tify Jam ie and Step hen as line or staff and

Exe rcis e S (Professional Ethics and End-of-Y

ear Gam es)

foods divi sion of Yummy

Jane Tan is the new division controller of the snack
l -i 5~ ¥r~w th in annual ·
Food s. Yum my Foods has reported a minimufl
s divi si?n has -r~ported .
earn ings for each of the past 5 years. The sn~ck f?od
sam e peno d. Duri ng the
annu al earn ings growth of over 20% ¢ach year m this
The corp orat e controller
curr ent year , the economy went into a recession.
my Foo ds this year. One
estim ates a I 0% annual earnings growth rate.for Yum
of the curr ent year , Tan
mon th befo re the December 31 fiscal · year-end
al eam /ngs growth of
estim ates the. snack foods 'division will report an annu
ion pres iden t, is less than
only 8 percent. Louie RyaQ, the snack foods divis
happ y, but he says with a wry smile, "Let. the end- of-year gam ~s begin." ·
.

follo wing list of end-of-

Tan mak es som e inquiries and is able to compile the
the prev ious division ·
year gam es that were more-or-less accepted by
cont rolle r:
Dec emb er on packaging
a. Defe rring routine monthly maintenance in
of next year .
equi pme nt by an independent contractor° until January
nd Dec emb e.r 31 so that
b. Exte ndin g the close of the current fiscal year beyo
.
som e sale s of next year are included in the current year
C. Alte ring date s of shipping documents of next
Janu ary' s sale s to record ·
.
them as sales in December of the current year.
er sale s targets.
d. Givi n~ salespeople a doub!e bonus to exceed Dec emb of
e. Defe~~ng the c1,1rrent_ peno d's advertising by redu cing the num ber
e than plan ned in
telev1s1on_ spots run m December and running mor
Janu ary of' next year. · .
· by havi·ng
. rted ad vert·1smg cost s
f. Defe rring the current. period 's . repo
y billi ng December
Yum ~y Foods o~ts1de advert1smg agency dela •
next yea r or havm g t he agen cy a lter
adve
. · January of
.rtise men ts until
mvo1ces to conceal the December date.

\
 ►

-
:sPonsi~Je for the
:s·the hne workers,
·rhe Professional Environment o/Cost Management 41

. g. Persuading carriers to accept merchandise for shipment in December of

,le for ·seeing that
the current year although they normally would not have done so.
,le for controllin g
Required:
I. · Why might the snack foods division president want to play the end-of-year
reasons. games described above?
2. The division controller is deeply troubled and reads the Standards of
Ethical Conduct/ or Management Accountants. Classify each of the end-
of-year games (a - g) as (i) acceptable , or (ii) unacceptable according to
vision of Yummy that document .
;rowth in annual 3. What should Tan do if Ryan suggests that end-of-year games are played
in every division of Yummy Foods and that she would greatly harm the
sion has -reported .
snack foods division if she does not play along and paint the rosiest picture
:riod. During the
possible of the division's .results?
porate controlle r
:is this year. One Exercise 6 (You get what you measure!)
1rrent year, Tan
nings growth of Each year, the president of Quark Electronics selects a single performance
lent, is less than measure, and offers significant financial bonuses to ·all key employees if the
1es begin." ·' company achieves a 10 percent improvement on the measure in comparison to
the prior year. He recently expressed the opinion that "this focuses my
g list of end-of- managers on a single, . specific target and gets them all working ~ogether to
!vious division achieve a major objective that will increase shareholder value."

Pilar Hernande z is a new member of the company' s board of directors, and she
on packagin g has begun to question the president' s approach to rewarding performance. In
e·xt year. particular, she is concerned that placing foo much emphasis on a single
performan ce measure may • lead managers to take actions that increase
mber 3 1 so that performan ce in terms of the measure but decrease the value of the firm. ls this
possible?
sales to record
Required:

\es targets. a. What negative consequence might occur if ~he performance measure is
:he number o f sales to new customers + total sales in the current year versus the prior
an planned in year? (Note: To receive a bonus, managers would need to increase this
ratio compared with the prior year.)
b. What negative consequen ce might occur if the performan ce measure is
:ts by hav in g
cost ofgoods sold +sales in the current year versus the prior year? (Note:
rtg Decembe r
To receive a bonus, managers would need to decrease this ratio compared .
agency alter
with the prior year.)
42 Chapter 2 --------
. mi ht occur if the performance measure .
c. What negative consequence g . ales in the current year vers 1s
. . ( e expense ~s us th
selling and admm1stra rv ., b managers would need to dee e
· year? (Note: T
pnor · o rece1ve .a onus, rease
this ratio compared with the prior year.)
· . nd Management Accountants)
Exercise 7 (The Roles of Managers a
. f that relate to organizations, the work f
Listed below are a number o terms . . o
f erial accountmg.
management, and the role o mana~
_ Line .
Budgets
_,Mara~r;al accounting
- Chief Financial Officer
...--Nonmonetary data
Controller
_ Performance _rep~rt
- Decentralization
- Directing and motivating __ Planning
- Feedback - Precision
_ Financial accounting - Staff

Choose the term .or ·terms above that most appropriately complete the
following·statements.
1 i1 A h 1·s concerned with providing information for the
. u:~~-Y\~~f
\

ll thd~ed'Jl'\\Jho
I are inside the organization, whereas
1- 1 ·i .
r
l~~, is concerned with providing information for the
• • •
use df those who are ou ,side the organization.

2. ~ \ ~~~ j h u · consists ·o f identifying alternatives, selecting

1
from among t),e alternatives the one that is best for the organization, and
specifying what actions will be taken to implement the chosen alternative.

3. When Dif'i1,~Nf ~ 1Jo~Jaj}~~ , managers oversee day-to-day activities

and keep the organization functioning smoo.thly. ·

4. The accounting and.other reports comi'ng to management that are used in

controlling the orga!lizatio~ are called · ~ tA0tAi \< .
1
5. The delegation of decision-making al:Jtho_rity throu~,h~ut an organization
by allowing managers at various operating levels to make key decisions
relating to their area of responsibility is called Oe1t~h'.o -1 (7_4 ~0 n
6. A posi!ion ?n t_he organization chart that is directly related to achieving
the b~s1c obJect1ves of an organization is called a Li Oe -
posit10n.
►

The Professional Environment of Cost Managem

ent 43
I ("' • ,

7. A ~ ~v\ ~ .,, position provides seTvice or assistance to other

parts of the drganization and does not directly achi
eve the basic objectjves
of the organization.

8. The manager in charge of the accounting depa

rtment is generally known
as the Coo±'f?\\tr
9. The plans of management are expressed form
ally in ~~/\ q f4 >
9. A detailed report to management comparing
budgeted data .to actual data
for a specific time period is called a "l ~ 1 ¼ MML
l ~t ?\? , ~ ·
I I

~ L n t' f ~ r l- ,. is the member of the top

/
10. The
management team
who is res onsible fot- 1pr~widing timely and
relev~nt data to supp ort
planning ·and control activities and for preparin
g financial statements for
external users. ,
12. Manageriai accounting places less emphasi
. and more emphasis on -1 {'((i) i 11 1
s on (\ ~f\ r,,.• f\~ t~~
than financial ccounting.
li~+~
. . I
Exercise 8 (Ethics in Business) .

Mar ia Reyes was hired by a popular fast-food resta

urant as an order-taker and
cashier. . S_hortly after ta~ing the job, she was shoc
ked to over hear an emp loye e
· bragging to a friend about shortchanging cust
omers. She confronted the
employee who then snapped back: "Mi nd you
r own business. Besides,
everyone _does it and the customers never miss the
mon ey." Mar ia didn 't know
how to respond to this.aggre·ssive stance.
·
Required:
Wha t would be the practical consequences on
the fast-food industry and on
consumers if cashiers generally shortchanged cust
omers at ever y opportunity? ·

hr
 Exercise 9 (Ethics and the Manager)
Happyville, Inc., operates a chain of dep~ment stores located in the
northwest. The first store began operations m 1965, and the company has
steadily grown to its present size of 44 stores. Two ~em:s ago, ~e board of
directors of Happyville approved a large-scale remodelmg of its stores to
attract a more upscale clientele.
Befor~ finalizing these plans, two stores were remod_eled as a _teSt Lisa Perez
assistant controller was asked to oversee the financial reporting for these tesi
stores, and she and other management personnel were offe~ed bonus~s based
on the sales growth and profitability of thes_e stores. Whtie completing the
financial reports, Perez discovered a sizable inventory of-outdated goods that
should have been discounted for sale or returned to the manufacturer. She
.. discussed the situation with her management colleagues; the consensus Was to
' .
ignore reporting .this it)ventory as obsolete, since reporting it would diminish
the financial results and their bonuses.
I
·

Required:
I . · According ~o ~he Standards of Ethi~al Conduct for .Practitioners of
Management Accounting and Financial Management, would it be ethical
for Perez not to report the inventory as obsolete? .
2. Would it be easy for Perez to take the ethical action in this situation?

·Exercise 10- (Preparing an Organization Chart)

Verona University is a large private school located in Mountain Province. The

university is headed by a president who has five vice presidents reporting to
him. These vice presidents are responsible· for auxiliary services, admissions
and records, academics, financial services (controller), and physical plant.

ln addition, the university has managers.who report to these vice presidents.- ·

These include managers for ce_ntral purchasing, the university press, and the
university bookstore, all of whom report to the vice president for auxiliary
services; managers, for computer services and for accounting and finance, who ·. -
report to t~e vice ~resideht for financial -services; and managers for grou~ds ·
and custodial services ~nd for plant and maintenance, who report to the vice
president for physical plant.
 The Professional Environment ofCost Management 45

Th~ university has four colleges - business, humanities, fine arts and
engineering and quantitative methods - and a law school. Each of these units
has a dean who is responsible to the academic vice president. Each college
has several departments.

Required:
I. Prepare an organization chart for Verona University .
2. Which of the positions on your chart would be line positions? Why would
they be line positions? W.hich would be staff positions? Why?
3. .Which of the positions on your chart would have need for accounting
information? Explain.

Exercise 11 (Ethics in Business)

Pedro Santos is the controller of a corporation whose stock is not listed on a

national stock exchange. The company has just received a patent on a product
that is expected to_yield ·substantial profits in a year or two. At the moment,
however, the company is experiencing financial difficulties; and because of
inadequate working capital, it is on the verge of defaulting on a note held by
its bank.

At the end of the most recent fiscal year, the company's president instructed
Santos not to record several invoices as·accounts payable. Santos objected
since the invoices represented bona fide liabilities. However, the president
insisted that the invoices not be recorded until after year-end, at which time it
was expected that additional financing could be obtained. After several very
strenuous objections - expressed to both the president and other members of
senior management- Santos finally complied with the president's instructions. ·

Required:
1. Did Santos act in an ethical manner? Explain fully. ,
2. If the new product (ails to •yield substantial profits and the ~ompany
becomes insolvent, can Santos' actions be justified by the fact that he was
following orders from a superior? Explain.