Discussion Forum

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Stellar Packaging Products Inc. manufactures laminated coffee bag packaging. It is a supplier to the largest coffee shop chain in the world. Stellar had a very strong performance year and planned to reward its employees with bonuses for their efforts in contributing to the company’s success. Bonus determination was to be based on each business unit’s performance after considering costs attributable to that unit. Stellar’s controller, Robin Simmons, knew that Stellar received an environmental cleanup penalty for a manufacturing plant malfunction that caused a chemical spill into an adjacent river during the past 12 months. In recording the amount on the company’s books, the production unit bore the burden of the penalty. Because of the size of the penalty expense that hit their business unit, the members of the manufacturing unit did not receive a bonus. The plant production manager, Frank Moses, approached Simmons and demanded that the penalty be removed from their business unit’s accounts and bonuses paid to his employees. He argued instead that it should be booked as an overhead cost to be shared among all business units since there were several contributing factors to the accident, not solely the manufacturing unit’s responsibility. Simmons is unsure how to respond. Based the definitions of expense categories you learned about in this module, do you think Moses has a reasonable basis for his position that the penalty should be borne as an overhead cost instead of a direct cost of production? If you agree with Simmons’s position that it should be a manufacturing expense, according to the IMA Statement of Ethical Professional Practice, how should Simmons handle Moses’s demands? Support your answer.

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