Aero Dynamics manufactures airplane parts and engines for a variety of military and civilian aircraft. The company is the sole provider of rocket engines for the U.S. military. The price is set at full cost plus a 5% markup. Aero Dynamics's current cost system is a direct labor hour-based overhead allocation system. Recently, the company conducted a pilot study on the feasibility of using an activity-based costing system. The study shows that the new ABC system, while more accurate and timely, will result in the assignment of lower costs to the rocket engines and higher costs to the company's other products. Apparently, the current direct labor-based costing system overcosts the rocket engines and undercosts the other products. On hearing of this, top management has decided to scrap the plans to adopt the ABC system because its rocket engine business with the military is significant and the reduced cost would lower the price and, thus, the profit for this part of Aero Dynamics's business. Required- 1. As the management accountant participating in this ABC pilot study project, what is your responsibility when you learn that top management has decided to cancel the plans for the ABC system? 2. How does professional ethics code apply to this case? 3. Regardless of your answer to 1 and 2, what you would actually do in real life if you faced this situation? What would be the likely consequences of your course of action?
Aero Dynamics manufactures airplane parts and engines for a variety of military and civilian aircraft. The company is the sole provider of rocket engines for the U.S. military. The price is set at full cost plus a 5% markup.
Aero Dynamics's current cost system is a direct labor hour-based overhead allocation system. Recently, the company conducted a pilot study on the feasibility of using an activity-based costing system. The study shows that the new ABC system, while more accurate and timely, will result in the assignment of lower costs to the rocket engines and higher costs to the company's other products. Apparently, the current direct labor-based costing system overcosts the rocket engines and undercosts the other products. On hearing of this, top management has decided to scrap the plans to adopt the ABC system because its rocket engine business with the military is significant and the reduced cost would lower the price and, thus, the profit for this part of Aero Dynamics's business.
Required-
1. As the management accountant participating in this ABC pilot study project, what is your responsibility when you learn that top management has decided to cancel the plans for the ABC system?
2. How does professional ethics code apply to this case?
3. Regardless of your answer to 1 and 2, what you would actually do in real life if you faced this situation? What would be the likely consequences of your course of action?
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