Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 8

Ethics, Cost System Selection Aero Dynamics manufactures airplane parts and engines for a variety of military and civilian aircraft. The company is the sole provider of rocket engines for the U.S. military that it sells for full cost plus a 5 percent markup.

Aero Dynamics’s current cost system is a direct labor-hour-based overhead allocation system. Recently, the company conducted a pilot study on the feasibility of using an activity-based costing system. The study shows that the new ABC system, while more accurate and timely, will result in the assignment of lower costs to the rocket engines and higher costs to the company’s other products. Apparently, the current direct labor-based costing system overcosts the rocket engines and undercosts the other products. On hearing of this, top management has decided to scrap the plans to adopt the ABC system because its rocket engine business with the military is significant and the reduced cost would lower the price and, thus, the profit for this part of Aero Dynamics’s business.

Required As the management accountant participating in this ABC pilot study project, what is your responsibility when you learn that top management has decided to cancel the plans for the ABC system? Can

you ignore your professional ethics code in this case? What would you do?

Step 1 of 4

Costing:

Costing refers to the process of accumulating, classifying and assigning the various costs to the products, services and special orders or projects to arrive at the accurate cost of such product or services.

Since every product and service go through different process so, different costing method is required. Job costing and process costing is two types of costing method.