Assigning Overhead to Jobs; Ethics
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-intensive; Department B is labor-intensive. Aero Systems has adopted a traditional plantwide rate using the direct labor-hour-based overhead allocation system. The company recently conducted a pilot study using a departmental overhead rate costing system. This system used two overhead allocation bases: machine-hours for Department A and direct labor-hours for Department B. The study showed that the system, which will be more accurate and timely, will assign lower costs to the government jobs and higher costs to the company’s nongovernmental jobs. Apparently, the current (less accurate) direct labor-based costing system has overcosted government jobs and undercosted private business jobs. On hearing of this, top management has decided to scrap the plans for adopting the new departmental overhead rate costing system because government jobs constitute 40 percent of Aero Systems’ business and the new system will reduce the price and thus the profit for this part of its business.
Required As the management accountant participating in this pilot study project, what is your responsibility when you hear of top management’s decision to cancel the plans to implement the new departmental overhead rate costing system? What would you do?
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