Ethics; Cost System Selection Aero Dynamics manufactures airplane parts and engines for avariety of military and civilian aircraft. The company is the sole provider of rocket engines for theU.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 costingsystem. The study shows that the new ABC system, while more accurate and timely, will result inthe 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 undercoststhe other products. On hearing of this, top management has decided to scrap the plans to adopt theABC system because its rocket engine business with the military is significant and the reduced costwould lower the price and, thus, the profit for this part of Aero Dynamics’s business.Required As the management accountant participating in this ABC pilot study project, what is yourresponsibility when you learn that top management has decided to cancel the plans for the ABC system?Can you ignore your professional ethics code in this case? What would you do?
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Ethics; Cost System Selection 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
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 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?
Can you ignore your professional ethics code in this case? What would you do?
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
