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Ethical Issues in Managerial Accounting for Budgeting, Absorption costing and ABC

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Discuss the general ethical dilemmas in Managerial Accounting and the guidelines set forth to resolve unethical issues.

Keys to remember:

-Discussion of general ethical issues in Managerial Accounting NOT FINANCIAL ACCOUNTING
-At least three sources cited in APA format

Areas to consider
-Budgeting
-Absorption Costing
-Activity Based Costing

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Solution Preview

General Ethical Dilemmas in Managerial Accounting

One of the 10 commandments of accounting is that general ethical dilemmas are everywhere in managerial accounting. One needs to understand and appreciate the behavioral and ethical issues faced by management accountants. There are different kinds of ethical constraints. This could be:
? conflicts between individual and organization values
? conflicts between the organizations's stated and practiced values.

Some of the examples of ethical dilemma are:

Overhead Allocation: Increasing or decreasing the predetermined overhead rate can manipulate the inventory level and profitability of the firm. Since the value of inventory under the absorption costing (generally used for profit and loss account) reflects the direct manufacturing cost and allocation of manufacturing overheads, the company's product cost changes with overhead allocation. Which in turn may help to understate or overstate the value of closing inventory and profits.
Moving administrative overheads to manufacturing overheads: In some case the line between whether a cost can be classified as administrative overhead or manufacturing overhead is very fine. By ...

Solution Summary

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Managerial Accounting

MANAGERIAL ANALYSIS
BYP8-2 Mo Vaugh and Associates is a medium-sized company located near a large
metropolitan area in the Midwest. The company manufactures cabinets of mahogany, oak, and other fine woods for use in expensive homes, restaurants, and hotels. Although some of the work is custom, many of the cabinets are a standard size. One such non-custom model is called Luxury Base Frame. Standard production is 1,000 units. Each unit has a direct labor hour standard of 5 hours. Overhead is applied to production based on standard direct labor hours. During the most recent month, only 900 units were produced; 4,500 direct labor hours were allowed for standard production, but only 4,000 hours were used. Standard and actual overhead costs were as follows.

Standard (1,000 units) Actual (900 units)
Indirect materials $12,000 $12,300
Indirect labor 43,000 51,000
(Fixed) Manufacturing 22,000 22,000
supervisors salaries
(Fixed) Manufacturing office 13,000 11,500
employees salaries
(Fixed) Engineering costs 27,000 25,000
Computer costs 10,000 10,000
Electricity 2,500 2,500
(Fixed) Manufacturing building 8,000 8,000
depreciation
(Fixed) Machinery depreciation 3,000 3,000
(Fixed) Trucks and forklift 1,500 1,500
depreciation
Small tools 700 1,400
(Fixed) Insurance 500 500
(Fixed) Property taxes 300 300
Total $143,500 $149,000

Instructions
a. Determine the overhead application rate.
b. Determine how much overhead was applied to production.
c. Calculate the controllable overhead variance and the overhead volume
variance.
d. Decide which overhead variances should be investigated.
e. Discuss causes of the overhead variances. What can management do to
improve its performance next month?

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