Question

TAC Industries, Inc. sells heavy equipment to large corporations and federal, state, and local governments. Corporate sales are the result of a competitive bidding process, where TAC competes against other companies based on selling price. Sales to government, however, are determined on a cost plus basis, where the selling price is determined by adding a fixed markup percentage to the total job cost. Tandy Lane is the cost accountant for the Equipment Division of TAC Industries, Inc. The division is under pressure from senior management to improve income from operations. As Tandy reviewed the division's job cost sheets, she realized that she could increase the division's income from operations by moving a portion of the direct labor hours that had been assigned to the job order cost sheets of corporate customers onto the job order cost sheets of government customers. She believed this would create a "win-win" situation for the division by (1) reducing the cost of corporate jobs, and (2) increasing the cost of government jobs whose profit is based on a percentage of job cost. Tandy submitted this idea to her division manager.

Is this ethical? Explain why.

Answer 1

1.In the question it is clarified that TAC Competes against other companies based on selling prce and selling price is determined by adding a fixed markup percentage to the total job cost in case of sales to the government. Now Tandy Lane suggested that some portion of direct labour hours shall be move from corporate customer to government customer so cost of government customer increased.

2.This plan is unethical if the direct labour hours is in excces then requiement under government customer job. It means we will try to increase cost of job by increasing the labour hours which is not required at all. TAC is in competitve market so if it will charge more amount from government then government may cancel the contract for next period.