Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 26

Activity-Based Costing of Customers: Ethical Issues

Red’s Lumber hired a consultant to update its system for reporting the cost of customers. The consultant showed Red an analysis that indicates that customer support costs are significantly higher for customers who order on weekends than for those who order during the week.

a.What pricing decisions might Red make based on the consultant’s information?

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b.Would these be ethical? Why or why not?

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c.The consultant comes back to Red’s office and explains that he made a mistake in the analysis. The relation is actually between cost of customer support and the customer’s gender. Does this affect your answers to requirements (a) and (b)?

Step 1 of 4

Cost accounting system

This is a system designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.

Cost allocation

Role of cost allocation comes into play when common cost needs to allocated to two or more products or departments. There different basis used for cost allocation like number units used, labors hours, area used by departments or products etc. Cost allocation base must be the one that best establishes the connection between the overhead incurred and the activity. Cause and effect basis can be effective way to identify cost allocation base.