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Ethics: Aero Systems, plantwide allocation rates vs ABC

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Aero Systems is a manufacturer of airplane parts and engines for a variety of military and commercial aircraft. It has two production departments. Department A is machine intense; Department B is labor intense. Aero Systems has adopted a traditional plantwide rate using direct labor hour based overhead allocation system. The company conducted a pilot study using dept overhead rate costing system. This system used two overhead allocation bases; machine hours for Dept A and direct labor hours for Dept B. The study showed that the system which would be more accurate and timely would will assign lower costs to the government jobs and higher costs to the company's nongovernment jobs and undercosted private jobs. On hearing of this the top management has decided to scrap plans for adopting the new departmental overhead rate costing system because the government jobs constitute 40% of the business and the new system would reduce the price and the profits.

As the accountant participating in this pilot study project which is your responsibility when your hear of the decision to cancel the plans? What would you do?

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Solution Summary

Your tutorial is 631 words and describes the responsibilities to yourself, the firm, and the profession. Examples of the consequences are given and a link to the IMA code of professional ethics is given for further work.

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As the accountant participating in this pilot study project which is your responsibility when you hear of the decision to cancel the plans? What would you do?

As a management accountant, you have an ethical duty not just to yourself and your firm but also to your profession and your vendors. That is, you have an equal duty to protect all parties. Failing to adopt a more careful allocation method, that better matches resources consumed with costs assigned, because it will reduce costs and therefore lower cost-plus contracts from government jobs is a violation of the IMA's Ethical Standards and shows a lack of professionalism. And, it is bad business. I would not do it and I would explain quite clearly how all the parties, me, the firm, the vendor and the profession are worse off with this failure to adopt the better allocation method.

Responsibility to self. If you are willing to look the other way on this allocation, what about the next one? What about an exaggerated predetermined overhead rate or budget that allows ...

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