Required:1. Summarize Doug's proposed solution. Do you believe that the solution proposed by Doug isethical? Explain why or why not.2. Suppose that Tonya decides that Doug's solution is not right and objects strongly. Furthersupposed that, despite Tonya's objections, Doug insists strongly on implementing the action.What should Tonya do?3. Discuss the situation in light of the IMA Statement of Ethical Professional Practice. 3.4 ETHICS CASE: ASSIGNING COSTSAdapted from Mowen's "Managerial Accounting (7th Ed.)" Case 4-67Tonya Martin, CMA and controller of the Parts Division of Gunderson Inc., was meeting withDoug Adams, manager of the division. The topic of discussion was the assignment of overheadcosts to jobs and their impact on the division's pricing decisions. Their conversation was asfollows:●Tonya: Doug, as you know, about 25% of our business is based on governmentcontracts, with the other 75% based on jobs from private sources won through bidding.During the last several years, our private business has declined. We have been losingmore bids than usual. After some careful investigation, I have concluded that we areoverpricing some jobs because of improper assignment of overhead costs. Some jobs arealso being underpriced. Unfortunately, the jobs being overpriced are coming from ourhigher- ume, labor-intensive products, so we re losing business.Doug: I think I understand. Jobs associated with our high-volume products are beingassigned more overhead than they should be receiving. Then when we add our standard40% markup, we end up with a higher price than our competitors, who assign costs moreaccurately.Tonya: Exactly. We have two producing departments, one labor-intensive and the othermachine-intensive. The labor-intensive department generates much less overhead thanthe machine-intensive department. Furthermore, virtually all of our high-volume jobsare labor-intensive. We have been using a plantwide rate based on direct labor hours toassign overhead to all jobs. As a result, the high-volume, labor-intensive jobs receive agreater share of the machine-intensive department's overhead than they deserve. Thisproblem can be greatly alleviated by switching to departmental overhead rates. Forexample, an average high-volume job would be assigned $100,000 of overhead using aplantwide rate and only $70,000 using departmental rates. The change would lower ourbidding price on high-volume jobs by an average of $42,000 per job. By increasing theaccuracy of our product costing, we can make better pricing decisions and win backmuch of our private-sector business.Doug: Sounds good. When can you implement the change in overhead rates?Tonya: It won't take long. I can have the new system working within four to six weeks-certainly by the start of the new fiscal year.Doug: Hold it. I just thought of a possible complication. As I recall, most of ourgovernment contract work is done in the labor-intensive department. This new overheadassignment scheme will push down the cost on the government jobs, and we will loserevenues. They pay us full cost plus our standard markup. This business is notthreatened by our current costing procedures, but we can't switch our rates for only theprivate business. Government auditors would question the lack of consistency in ourcosting procedures.Tonya: You do have a point. I thought of this issue also. According to my estimates, wewill gain more revenues from the private sector than we will lose from our governmentcontracts. Besides, the costs of our government jobs are distorted. In effect, we areovercharging the government.Doug: They don't know that and never would unless we switch our overhead assignmentprocedures. I think I have the solution. Officially, let's keep our plantwide overhead rate.All of the official records will reflect this overhead costing approach for both our privateand government business. Unofficially, I want you to develop a separate set of books thatcan be used to generate the information we need to prepare competitive bids for ourprivate-sector business.

Question

Required:1. Summarize Doug's proposed solution. Do you believe that the solution proposed by Doug isethical? Explain why or why not.2. Suppose that Tonya decides that Doug's solution is not right and objects strongly. Furthersupposed that, despite Tonya's objections, Doug insists strongly on implementing the action.What should Tonya do?3. Discuss the situation in light of the IMA Statement of Ethical Professional Practice. 3.4 ETHICS CASE: ASSIGNING COSTSAdapted from Mowen's &#34;Managerial Accounting (7th Ed.)&#34; Case 4-67Tonya Martin, CMA and controller of the Parts Division of Gunderson Inc., was meeting withDoug Adams, manager of the division. The topic of discussion was the assignment of overheadcosts to jobs and their impact on the division's pricing decisions. Their conversation was asfollows:●Tonya: Doug, as you know, about 25% of our business is based on governmentcontracts, with the other 75% based on jobs from private sources won through bidding.During the last several years, our private business has declined. We have been losingmore bids than usual. After some careful investigation, I have concluded that we areoverpricing some jobs because of improper assignment of overhead costs. Some jobs arealso being underpriced. Unfortunately, the jobs being overpriced are coming from ourhigher- ume, labor-intensive products, so we re losing business.Doug: I think I understand. Jobs associated with our high-volume products are beingassigned more overhead than they should be receiving. Then when we add our standard40% markup, we end up with a higher price than our competitors, who assign costs moreaccurately.Tonya: Exactly. We have two producing departments, one labor-intensive and the othermachine-intensive. The labor-intensive department generates much less overhead thanthe machine-intensive department. Furthermore, virtually all of our high-volume jobsare labor-intensive. We have been using a plantwide rate based on direct labor hours toassign overhead to all jobs. As a result, the high-volume, labor-intensive jobs receive agreater share of the machine-intensive department's overhead than they deserve. Thisproblem can be greatly alleviated by switching to departmental overhead rates. Forexample, an average high-volume job would be assigned $100,000 of overhead using aplantwide rate and only $70,000 using departmental rates. The change would lower ourbidding price on high-volume jobs by an average of $42,000 per job. By increasing theaccuracy of our product costing, we can make better pricing decisions and win backmuch of our private-sector business.Doug: Sounds good. When can you implement the change in overhead rates?Tonya: It won't take long. I can have the new system working within four to six weeks-certainly by the start of the new fiscal year.Doug: Hold it. I just thought of a possible complication. As I recall, most of ourgovernment contract work is done in the labor-intensive department. This new overheadassignment scheme will push down the cost on the government jobs, and we will loserevenues. They pay us full cost plus our standard markup. This business is notthreatened by our current costing procedures, but we can't switch our rates for only theprivate business. Government auditors would question the lack of consistency in ourcosting procedures.Tonya: You do have a point. I thought of this issue also. According to my estimates, wewill gain more revenues from the private sector than we will lose from our governmentcontracts. Besides, the costs of our government jobs are distorted. In effect, we areovercharging the government.Doug: They don't know that and never would unless we switch our overhead assignmentprocedures. I think I have the solution. Officially, let's keep our plantwide overhead rate.All of the official records will reflect this overhead costing approach for both our privateand government business. Unofficially, I want you to develop a separate set of books thatcan be used to generate the information we need to prepare competitive bids for ourprivate-sector business.

Accepted Answer

In this instance, Tonya Martin, the controller, and Doug Adams, the manager of Gunderson Inc.'s…