Question

Ch 3 - EYK3-3 - p. 113

Ethics Case Metal Creations, Inc., is a custom manufacturer that uses a job order costing system. Currently, Metal Creations has 35% excess capacity in its factory. Charlie Rollins, the president, has instituted a campaign to obtain new customers. Rollins has offered the salespeople a bonus equal to 25% of the gross profit on work for new customers. The average gross profit rate has been 30% of the contract price.

Steve Starling, the sales manager for Metal Creations, wants to submit a proposal to a new customer that undercuts the usual pricing structure by 30%. As a result, this job would have no gross profit using the regular job order costing system. Instead, Starling suggest that the overhead rate applied to this job should be only 40% of the normal overhead rate, resulting in a gross profit of 28%. Starling suggest that the controller should handle this contract herself, and that no one else in the organization should know about it, especially the other salespeople, because the creative approach to overhead application might create problems.

Required

Does taking an order at a significantly reduced price create an ethical problem? Does altering the accounting for a particular order create an ethical problem? Does asking the controller to handle the contract and keep the accounting confidential to create an ethical problem?

Answer 1

Yes taking order at a significantly reduced price creates ethical problem since Standard Operating procedure has been violated. Gross profit will not be achieved as per the procedure since price is undercut by 30%. The price has been undercut just to get new customers by offering bonus to salespeople.

Yes altering for a particular order creates ethical problem since overhead has been under applied compared to standard overhead rate applied for usual orders. If the normal overhead rate was applied this job would have created loss to the organization because of lower pricing structure. Instead lower overhead rate is applied just to show profit for this particular job order

Yes, keeping the accounting confidential will create ethical problem since transparency would be lost for fixing the job order prices. Also the standard protocol of charging overheads is not followed thereby causing revenue loss to the organization.