Question

Calvin Cabello is a new production analyst at Red Duv Aviation, in the division of the company that manufactures three parts used in small airplane engines. One of his first jobs is to update the predetermined overhead allocation rates for factory production costs. Normally this is done once a year. The production analyst takes into consideration the previous year's actual data along with projected changes and calculates a new rate. Calvin completed his calculations but was confused by what he found. He noticed the activity rate for "maintenance" had almost doubled in one year. Confused by this, he spoke with the factory manager, Priscilla Posey, who proceeded to tell him to just spread the costs out over the other activities. Calvin knew this wasn't right, but had been newly hired and really needed to keep his job. Later that week while at the local pub, after work, Calvin overheard some employees that worked at Red Duv talking about making extra money on the weekends helping Priscilla restore an old airplane. It occurred to Calvin that the reason the maintenance activity rate was so high, was because Priscilla had been using factory labor, tools, and supplies to have her personal airplane restored.

Questions

--Besides finding irregularities, such as the case of the unusual increase in this situation, discuss other ways that ABC cost data can be useful for manufacturing companies.

--Discuss the primary standard from the IMA statement of Ethical Professional Practice that Priscilla violated in this scenario.

--Would Priscilla have been able to do this if Traditional Costing methods had been used?

--What would you recommend Calvin do?

Answer 1

1)-ABC BENEFITS ARE-

A)-OVERHEADS GET ALLOCATED TO THEIR RESPECTIVE DEPARTMENTS.HENCE THERE IS NO CHNACE OF ANY MISAPPROPRIATION OF ANY OF THE EXPENDITURE WITH RESPEDCT TO ANY DEPARTMENT.

B)-SINCE OVERHEADS ARE DIRECTLY APPORTIONED TO THE CONCERNED COST CENTRES, THERE IS NO CASE OF UNDER OR OVER ABSORPTION OF OVERHEAD EXPENDITURE AND THUS A TRUE AND FAIR COST REPORT CAN BE GENERATED.

C)-INEFFICIENT DEPARTMENTS CAN EASILY BE FOUND OUT WITH HELP OF ABC.AND THUS PREVENTIVE AND CORRECTIVE MEASURES CAN BE TAKEN AGAINST THEM.

3)-YES SUCH A FRAUD WOULD HAVE BEEN POSSIBLE EVEN IN CASE OF TRADITIONAL COSTING.THE ONLY DIFFERENCE WOULD HAVE BEEN TO DIFFICULT TO IDENTIFY THE AREA WHERE SUCH FRAUD HAD BEEN COMMITTED IN CASE OF TRADITIONAL COSTING.

4)-I WOULD RECOMMEND CALVIN TO REPORT THE MATTER TO THE BOARD OR AT THE TOP MANAGEMENT LEVEL AND LET THEM THE FINAL ACTION.