Concept explainers
Morelli Electric Motor Corporation’s controller, Erin Jackson, developed new product costs for the standard, deluxe, and heavy-duty models using activity-based costing. It was apparent that the firm’s traditional product-costing system had been under costing the deluxe-model electric motor by a significant amount. This was due largely to the low volume of the deluxe-model motor. Before she could report back to the president, Jackson received a phone call from her friend, Alan Tyler. He was the production manager for the deluxe-model electric motor. Tyler was upset, and he let Jackson know it. “Erin, I’ve gotten wind of your new product-cost analysis. There’s no way the deluxe model cost’s anywhere near what your numbers say. For years and years, this line has been highly profitable, and its reported product cost was low. Now you’re telling us it costs more than twice what we thought. I just don’t buy it.”
Jackson briefly explained to her friend about the principles of activity-based costing and why it resulted in more accurate product costs. “Alan, the deluxe model is really losing money. It simply has too low a volume to be manufactured efficiently.”
Tyler was even more upset now. “Erin, if you report these new product costs to the president, he’s going to discontinue the deluxe model. My job’s on the line, Erin! How about massaging those number’s a little bit. Who’s going to know?”
“I’ll know, Alan. And you’ll know,” responded Jackson. “Look, I’ll go over my analysis again, just to make sure I haven’t made an error.”
Required:
Discuss the ethical issues involved in this scenario.
- 1. Is the controller, Erin Jackson, acting ethically?
- 2. Is the production manager, Alan Tyler, acting ethically?
- 3. What are Jackson’s ethical obligations? To the president? To her friend?
Want to see the full answer?
Check out a sample textbook solutionChapter 5 Solutions
Managerial Accounting: Creating Value in a Dynamic Business Environment
- Maglie Company manufactures two video game consoles: handheld and home. The handheld consoles are smaller and less expensive than the home consoles. The company only recently began producing the home model. Since the introduction of the new product, profits have been steadily declining. Management believes that the accounting system is not accurately allocating costs to products, particularly because sales of the new product have been increasing. Management has asked you to Investigate the cost allocation problem. You find that manufacturing overhead is currently assigned to products based on their direct labor costs. For your investigation, you have data from last year. Manufacturing overhead was $1.337,000 based on production of 310,.000 handheld consoles and 95,000 home consoles. Direct labor and direct materials costs were as follows. Handheld Home $409,000 696,000 Total $1,671,250 1,476,000 Direct labor $1,262,250 780,000 Materials Management has determined that overhead costs are…arrow_forwardMaglie Company manufactures two video game consoles: handheld and home. The handheld consoles are smaller and less expensive than the home consoles. The company only recently began producing the home model. Since the introduction of the new product, profits have been steadily declining. Management believes that the accounting system is not accurately allocating costs to products, particularly because sales of the new product have been increasing. Management has asked you to investigate the cost allocation problem. You find that manufacturing overhead is currently assigned to products based on their direct labor costs. For your investigation, you have data from last year. Manufacturing overhead was $1,125,000 based on production of 310,000 handheld consoles and 110,000 home consoles. Direct labor and direct materials costs were as follows. Handheld Home Total Direct labor $ 1,022,250 $ 384,000 $ 1,406,250 Materials 700,000 712,000 1,412,000…arrow_forwardAsbury Coffee Enterprises (ACE) manufactures two models of coffee grinders: Personal and Commercial. The Personal grinders have a smaller capacity and are less durable than the Commercial grinders. ACE only recently began producing the Commercial model. Since the introduction of the new product, profits have been steadily declining, although sales have been increasing. The management at ACE believes that the problem might be in how the accounting system allocates costs to products. The current system at ACE allocates manufacturing overhead to products based on direct labor costs. For the most recent year, which is representative, manufacturing overhead totaled $2,037,000 based on production of 30,000 Personal grinders and 10,000 Commercial grinders. Direct costs were as follows: Personal Commercial Total Direct materials $ 1,445,000 $ 620,000 $ 2,065,000 Direct labor 1,030,000 667,500 1,697,500 Management has determined that overhead costs are caused by three cost…arrow_forward
- Asbury Coffee Enterprises (ACE) manufactures two models of coffee grinders: Personal and Commercial. The Personal grinders have a smaller capacity and are less durable than the Commercial grinders. ACE only recently began producing the Commercial model. Since the introduction of the new product, profits have been steadily declining, although sales have been increasing. The management at ACE believes that the problem might be in how the accounting system allocates costs to products. The current system at ACE allocates manufacturing overhead to products based on direct labor costs. For the most recent year, which is representative, manufacturing overhead totaled $2,023,500 based on production of 30,000 Personal grinders and 10,000 Commercial grinders. Direct costs were as follows: Personal Commercial Total Direct materials $ 1,444,200 $ 609,750 $ 2,053,950 Direct labor 1,029,000 657,250 1,686,250 Management has determined that overhead costs are caused by three cost…arrow_forwardSteve Morgan, controller for Newton Industries, was reviewing production cost reports for the year. One amount in these reports continued in to bother him – advertising. During the year the company had instituted an expensive advertisement campaign to sell some of its slower-moving products. It was still too early to tell whether the advertising campaign was successful. There had been much internal debate as how to report advertising cost. The vice president of finance argued that advertising costs should be reported as cost of production, just like direct material and direct labor. He therefore recommended that this cost be identified as manufacturing overhead and reported as part of inventory costs until sold. Others disagreed. Morgan believed that this cost should be reported as an expense of the current period, so as not to overstate net income. Others argued that it should be reported as prepaid advertising and reported as a current asset. The president finally had to decide…arrow_forwardMaggie Co manufactures two video consoles: handheld and home. The handheld are smaller and less expensive than the home consoles. Since the intro of the home model profits have been steadily declining. Management believes it is because of the inaccurate allocation of costs to the products, particularly since the volume of home console sales have been increasing. Upon investigation, you find that overhead cost is currently assigned to products based on their direct labor costs. Data showed that overhead last year was $1,440,000 based on 28,000 handheld consoles and 10,000 home consoles. Direct materials and direct labor costs were as follows: HANDHELD HOME TOTAL Direct Materials $ 750,000 $ 684,000 $ 1,434,000 Direct Labor 1,160,400 439,600 1,600,000 Management, after a careful study, has determined that overhead are caused by three cost drivers. These cost drivers and their costs for last year are as follows: COST DRIVER ASSIGNED COSTS…arrow_forward
- Jason's Outdoors manufactures two products: snow skis and water skis. Jason's managerial accountant suspects that product cost distortion through factory overhead allocation is occurring where snow skis are underpriced and water skis are overpriced. Based on this information, which of the following statements is true? a. Snow skis likely consumed a larger proportion of factory overhead than was allocated. b. Jason's should expand production of snow skis. c. Jason's accountant should ignore the cost distortions. d. Jason's concludes that it is applying its factory overhead properly.arrow_forwardAsbury Coffee Enterprises (ACE) manufactures two models of coffee grinders. Personal and Commercial. The Personal grinders have a smaller capacity and are less durable than the Commercial grinders. ACE only recently began producing the Commercial model. Since the introduction of the new product, profits have been steadily declining, although sales have been increasing. The management at ACE believes that the problem might be in how the accounting system allocates costs to products. The current system at ACE allocates manufacturing overhead to products based on direct labor costs. For the most recent year, which is representative, manufacturing overhead totaled $1,929,000 based on production of 30,000 Personal grinders and 10,000 Commercial grinders. Direct costs were as follows: Direct materials Direct labor Cost Driver Number of production runs Quality tests performed Shipping orders processed Total overhead Management has determined that overhead costs are caused by three cost…arrow_forwardAsbury Coffee Enterprises (ACE) manufactures two models of coffee grinders: Personal and Commercial. The Personal grinders have a smaller capacity and are less durable than the Commercial grinders. ACE only recently began producing the Commercial model. Since the introduction of the new product, profits have been steadily declining, although sales have been increasing. The management at ACE believes that the problem might be in how the accounting system allocates costs to products. The current system at ACE allocates manufacturing overhead to products based on direct labor costs. For the most recent year, which is representative, manufacturing overhead totaled $1,902,000 based on production of 30,000 Personal grinders and 10,000 Commercial grinders. Direct costs were as follows: Direct materials Direct labor Personal $ 1,437,000 1,020,000 Commercial $ 517,500 565,000 Total $ 1,954,500 1,585,000 Management has determined that overhead costs are caused by three cost drivers. These…arrow_forward
- You’re in Hot Water Inc. manufactures Jacuzzi hot tubs. The company produces two models, the “Basic” and the “Superjet” which promises a jet power setting that “borders on cruel”. Since the introduction of the Superjet, the company’s profits have been faltering, despite increased sales. The company’s senior accountant believes that the costing system may be causing problems. The company uses direct-labour hours as the basis for applying overhead. Overhead is estimated to be $300,000. The following cost data is known: Basic Superjet Direct Materials $700 $1200 Direct Labour ($15 per hour) 60 90 Number of units produced 600 units 100 units The CFO wishes to explore an activity-based costing system Activity (Cost Driver) Estimated MOH Expected Activity Total Basic Superjet Assembly (Labour Hours) $60,000 3,000 2,400 600 Quality control (Inspection Hours) 75,000 800 600 200…arrow_forwardBarbara, the manager of Metlock, is analyzing the company's MOH costs from last year. Metlock had always followed an actual costing system when determining the costs of its customizable telescopes. Barbara wondered if it would be better to switch to a normal costing system, as she had heard a number of people talking about that at an industry conference she attended the previous month. Since Metlock has a highly machine-intensive operation, machine hours are used as its MOH cost driver. Here are the costs and other MOH information Barbara is analyzing: Budgeted MOH cost Actual MOH cost Budgeted machine hours Actual machine hours $426,240 Actual MOH rate $ 419,040 Determine the actual MOH rate and the budgeted MOH rate Metlock would have used last year under actual costing and normal costing, respectively. (Round answers to 2 decimal places, e.g. 52.75.) Budgeted MOH rate $ 96,000 108,000 /machine hour /machine hourarrow_forwardZett Company has been using FIFO process costing for tracking the costs of its manufacturing activities. But, in recent months, the system has become somewhat bogged down with details. It seems that, when the company purchased ABB Electronics last year, its product lines increased six-fold. This has caused both the accountants and the suppliers of the information, the line managers, great difficulty in keeping the costs of each product line separate. Likewise, the estimation of the completion of ending work-in-process inventories and the associated costs has become very cumbersome. The CFO of the company is looking for ways to improve the reporting system of product costs. What can you recommend to improve the situation?arrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education