As in all accounting areas, there is an opportunity to manipulate the data in a costing system. Managers want the data to make their departments look profitable. However, sometimes the data is not favorable and managers attempt to hide the facts. Managers (or the accountants they influence) can accomplish this in few ways. As a cost accountant, you may encounter the following scenarios, so it is important to understand what they are and how they affect the firm’s bottom line.
Managers should avoid following unethical actions:
Misstate the Stage of Completion. Managers need to know how the far along in the production process a project is and how the estimated costs are matching up with this percentage of completion. For example, if a project is 75% complete, but costs are at nearly 100% of the projection, then managers will need to report that costs are going to be higher than expected. Managers can forestall this information by reporting that the project is further along than it is, thereby matching the costs incurred with the fictitious stage of completion.
Charge Costs to the Wrong Job. To avoid cost overruns, managers can allocate costs from projects that are in danger of exceeding cost estimates to those jobs that are not. This cheats those customers that are paying on a cost-plus basis, and is illegal because it constitutes fraud.
Misrepresent the Cost of a Job. Managers can misstate the cost of a job as higher than it is in order to pad the bottom line. Another method would be to allocate overhead costs in the way that provides the most favorable results, rather than using an allocation base that truly represents how the resources were used.
(Lanen, 2015, p. 251–252).
Instructions
Please read the following scenario:
San Mateo Shipyards completes work for both the U.S. Coast Guard and private shipping companies. San Mateo’s major business is repairing ships, which it does at two company dry docks referred to by the names of the local towns: Downey and Long Beach.
Data on operations and costs for the two dry docks are below:
Downey Long Beach
Overhead Costs
$30,000,000
$85,000,000
Direct Labor hours
250,000
250,000
San Mateo is about to start two jobs, one for the Coast Guard under a cost-plus contract and one for a private shipping company for a fixed fee. Both jobs will require the same number of labor hours. You have been asked to prepare some costing information. Your supervisor tells you that she is sure the Coast Guard job will be done at Long Beach, and that the private job will be done at Downey.
Compute the overhead rate for both shipyards and include this in your initial post. Also discuss the following questions:
Why do you think that your supervisor believes the Coast Guard job will be performed at Long Beach?
Is the choice of production location ethical? Why, or why not?
