Question

Calvin Cabello is a new production analyst at Red Duv Aviation, in the division of the company that manufactures three parts used in small airplane engines. One of his first jobs is to update the predetermined overhead allocation rates for factory production costs. Normally this is done once a year. The production analyst takes into consideration the previous year's actual data along with projected changes and calculates a new rate. Calvin completed his calculations but was confused by what he found. He noticed the activity rate for "maintenance" had almost doubled in one year. Confused by this, he spoke with the factory manager, Priscilla Posey, who proceeded to tell him to just spread the costs out over the other activities. Calvin knew this wasn't right, but had been newly hired and really needed to keep his job.

Later that week while at the local pub, after work, Calvin overheard some employees that worked at Red Duv talking about making extra money on the weekends helping Priscilla restore an old airplane. It occurred to Calvin that the reason the maintenance activity rate was so high, was because Priscilla had been using factory labor, tools, and supplies to have her personal airplane restored.

Questions

--Besides finding irregularities, such as the case of the unusual increase in this situation, discuss other ways that ABC cost data can be useful for manufacturing companies.

--Discuss the primary standard from the IMA statement of Ethical Professional Practice that Priscilla violated in this scenario.

--Would Priscilla have been able to do this if Traditional Costing methods had been used?

--What would you recommend Calvin do?

Answer 1

Ans:

A.)

Other than the Irregularities found in the above case, following are some other advantages or merits of ABC costing for manufacturing companies:

1. Improves the manager’s decision making ability
2. Helps to identify spare production capacity and enables cost reduction
3. Provides reliable and accurate determination of Product costs
4. Improve organizational efficiency
5. Helps the organization in reduction of costs and identification of non value adding activities
6. It traces costs beyond product costs and towards areas of managerial responsibility, procedures, departments, customers and processes.

B.)

Analyzing the above scenario it can be concluded that Priscilla has violated the professional standards because as per the “Integrity Clause” of the Statement of Ethical Professional Practice issued by the Institute of Management Accountants (IMA) each member has a responsibility to “Refrain from engaging in any conduct that would prejudice carrying out his duties ethically”

C.)

Yes, Priscilla would still have been able to misuse the company resources even if Traditional Costing method had been used, because traditional costing method uses the methodology to allocate all overhead costs to the produced inventory on the basis of the quantities produced and do not have any mechanism to track the increase in the performance of a particular activity unlike ABC costing, the same attribute led to the above scenario being detected.

D.)

As per the Statement of Ethical Professional Practice issued by the Institute of Management Accountants (IMA), when a member is faced with ethical issues, he/ she should follow the organization's established policies on the resolution of such conflict. If these policies do not resolve the ethical conflict, he/ she should consider the following courses of action:

1. Discuss the issue with your immediate supervisor except when it appears that the supervisor is involved.
2. Clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethics Counselor or other impartial advisor
3. Consult your own attorney as to legal obligations and rights concerning the ethical conflict.

Reference for the above has been taken from the IMA Statement of Ethical Professional Practice provided on www.imanet.org