Chapter 3 Job Order Costing Case 318 Ethics And The Manager

Chapter 3 Job Order Costingcase 318 Ethics And The Manager Course

Develop an analysis of a managerial ethical dilemma involving the modification of a predetermined overhead rate for a division, including calculations of product costs, overhead application, and implications of management decisions on operational and ethical grounds. Additionally, prepare an Excel spreadsheet documenting calculations and a PowerPoint presentation discussing the ethical issues and providing a recommendation about altering the overhead estimate.

Paper For Above instruction

The scenario presented in Chapter 3 of the Job Order Costing case 3-18 revolves around a significant ethical and operational dilemma faced by Terri Ronsin, the new divisional controller at National Home Products’ Home Security Systems Division. Her task involves establishing the division’s predetermined overhead rate, a critical component in product costing and managerial decision-making. However, she encounters managerial pressure to modify the assumptions used in calculating this rate to benefit the division's financial reports, raising questions about ethics, managerial integrity, and operational efficiency.

Initially, Terri computes the predetermined overhead rate based on her estimate of 440,000 direct labor-hours, which aligns with the production manager’s projections. Using this estimate, the rate is calculated by dividing the total estimated manufacturing overhead ($8,400,000) by the estimated direct labor-hours. This establishes a basis for applying overhead costs to products during the year, affecting cost allocation accuracy and ultimately, profit measurement. When 442,000 units are produced, the overhead applied is derived by multiplying the predetermined rate by the actual units produced, illustrating the importance of accurate rate setting for correct product costing.

The division's general manager, Harry Irving, suggests reducing the estimated direct labor-hours from 440,000 to 420,000, citing an informal agreement to shave estimates annually for financial and bonus incentives. This reduction would increase the predetermined overhead rate, leading to higher overhead application per unit, which could inflate reported costs and potentially manipulate cost of goods sold and net income. Terri faces the dilemma of whether to accept this request, considering operational integrity and ethical standards. Ethically, knowingly providing inaccurate overhead estimates undermines transparency and honesty, key principles in managerial accounting and corporate governance. Operationally, this could distort cost information, mislead management decisions, and impact external reporting, especially regarding profitability and efficiency assessments.

Considering the calculations, with an estimated overhead rate based on 440,000 hours, the per-unit cost of a product would be determined by summing direct materials, direct labor, and allocated overhead per unit. For materials costing $40 and labor costing $20 per unit, the overhead application depends on the rate. When actual production is 442,000 units, overhead applied under the original estimate can be compared with the actual overhead incurred of $8,450,000 to assess over- or under-applied overhead. The same process applies under the hypothetical reduced estimate of 420,000 hours; however, the higher overhead rate resulting from a lower estimated labor base could distort cost allocations and profitability reports.

The actual overhead incurred versus allocated overhead determines whether overhead is over- or under-applied. For instance, with 440,000 estimated hours, the applied overhead is calculated using the predetermined rate, and differences with actual overhead highlight the accuracy of estimates. Under the 420,000-hour estimate, the rate increases, potentially leading to more significant overapplied overhead. This discrepancy influences net income calculations, especially since over- or under-applied overhead is closed to Cost of Goods Sold (COGS), directly affecting net operating income. An adjustment of $900,000 in operating income before the adjustment indicates notable impact, requiring analysis of whether the managerial decision aligns with ethical standards and operational efficiency.

From an operational perspective, setting accurate overhead rates ensures reliable product costing, aids in pricing decisions, and maintains managerial control. Ethically, managers must prioritize transparency and honesty over manipulated estimates aimed at short-term financial gains, such as bonuses. The ethical principle of integrity discourages intentionally biased estimates that can mislead stakeholders, distort performance evaluations, and compromise corporate reputation.

In conclusion, Terri Ronson faces a clear ethical choice: comply with the divisional manager’s request to manipulate the overhead estimate or uphold managerial integrity by using truthful estimates. Given the potential for financial misrepresentation and unethical behavior, it is advisable for her to resist the pressure and advocate for accurate, unbiased estimates. Such an approach promotes ethical standards, enhances operational decision-making, and sustains the company’s long-term reputation and trustworthiness in financial reporting.

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