Chapter 7, Problem 60P

Job Costing and Ethics

Global Partners is a manufacturing company that produces parts both for inventory and to custom specifications. Parts produced for inventory are sold at prices determined in the market. Custom parts are sold at a price equal to production cost plus a profit based on the cost of production. Although custom parts are different from the standard parts produced for inventory, the same production processes, equipment, labor, and materials are used for both.

The CFO is designing a new cost system and is debating between direct labor-hours and direct labor cost as a basis for applying overhead to products.

Required

1. a.      Why (under what circumstances) would this choice lead to different costs being assigned to standard and custom products?
2. b.      Would it be ethical to decide on the allocation basis by considering the effect of the choice on the relative costs? Explain.