Question

Assume you recently accepted a job with a company that designs and builds helicopters for commercial and military use. The company has numerous contracts with the U.S. military that require the use of cost-plus pricing. In other words, the contracted price for each helicopter is calculated at a certain percentage (about 130 percent) of the total cost to produce it. Unlike the cost- plus pricing approach used for military contracts, the prices for civilian helicopters are based on the amount that individuals and corporations are willing to pay for a state-of-the-art helicopter. As your first assignment, the company controller has asked you to reevaluate the costing system currently used to determine the cost of producing helicopters. The company assigns manufacturing overhead based on the number of units produced. The result is that every helicopter is assigned the same amount of overhead regardless of whether it is for military or civilian use. As part of your assignment, you collected the following information about several other potential allocation bases and how they differ for the two types of customers the company serves: Unts produced Labor hours Machine hours Number of setups Engineering hours Qualty Inspections Military Contracts Units in Porcent Allocation Base of Total 1,000 SOX 200,000 40 700,000 70 50 25 3,000 30 4,000 20 Civilian Contracts Units in Parcent Allocation Rose of Total 1,000 5056 1.200,000 60 300,000 30 150 75 7,000 70 16,000 80 2,000 2,000,000 1,000,000 200 10,000 20,000

Answer 1

1.

In the given case if the company shift from normal cost allocation to abc allocation, then will not be only allocated on the basis of machine hours but will be also allocated on the basis of other cost drivers as well.

2.

As per my view company should opt for abc costing as tgis is more rational and ethical approach irrespective of getting more profit.

3.

Ethical issue is that the company wants to charge more cost for military helicopter as this will lead to enhanced revenue and more profit.

This against ethical and professional principles.