case 5 Management Accounting
Case 5-60
1. The solution Doug proposes is not ethical. Although maintaining the current plant-wide rate is probably not illegal, its continuation has one purpose: to extract profits from government business. Doug knows the plant-wide rate is not accurately assigning overhead costs to various jobs and is willing to alter the assignments on an “unofficial basis” for purposes of bidding on private-sector jobs. Fundamentally, ethical behavior is concerned with choosing right over wrong. To knowingly overcharge government for future business certainly seems so wrong. To continue overpricing knowing the new overhead rates would more than make up for any lost profits from the government sector through more competitive bidding in the private sector is a clear indication of greed. While managers have an obligation to maximize profit and shareholders wealth, this obligation must be within ethical boundaries
In addition, the solution proposed by Doug is not ethical as he is using a plant-wide rate as costing approach for both private and government business but he uses departmental overhead rate to make bidding prices competitive. This arises due to the company having two producing departments, one labour intensive and the other is machine intensive. This is a violation of at least two major ethical standards: integrity and objectivity.
The labour intensive department generates lesser overhead than machine-intensive department. Furthermore, virtually all of their high-volume jobs are labour-intensive. The company is using a plant-wide rate based on their direct labour hours to assign overhead to all jobs. As a result, the high volume, labour intensive jobs receive greater share of the machine intensive department’s overhead than they really deserve.
This problem can greatly alleviated by switching to departmental overhead rates. But as most of the company’s government contract work is done in the labour intensive department and the department overhead will
1. The solution Doug proposes is not ethical. Although maintaining the current plant-wide rate is probably not illegal, its continuation has one purpose: to extract profits from government business. Doug knows the plant-wide rate is not accurately assigning overhead costs to various jobs and is willing to alter the assignments on an “unofficial basis” for purposes of bidding on private-sector jobs. Fundamentally, ethical behavior is concerned with choosing right over wrong. To knowingly overcharge government for future business certainly seems so wrong. To continue overpricing knowing the new overhead rates would more than make up for any lost profits from the government sector through more competitive bidding in the private sector is a clear indication of greed. While managers have an obligation to maximize profit and shareholders wealth, this obligation must be within ethical boundaries
In addition, the solution proposed by Doug is not ethical as he is using a plant-wide rate as costing approach for both private and government business but he uses departmental overhead rate to make bidding prices competitive. This arises due to the company having two producing departments, one labour intensive and the other is machine intensive. This is a violation of at least two major ethical standards: integrity and objectivity.
The labour intensive department generates lesser overhead than machine-intensive department. Furthermore, virtually all of their high-volume jobs are labour-intensive. The company is using a plant-wide rate based on their direct labour hours to assign overhead to all jobs. As a result, the high volume, labour intensive jobs receive greater share of the machine intensive department’s overhead than they really deserve.
This problem can greatly alleviated by switching to departmental overhead rates. But as most of the company’s government contract work is done in the labour intensive department and the department overhead will