Professional ethics and reporting division performance. Hannah Gilpin is the controller of Blakemore Auto Glass, a division of Eastern Glass and Window. Blakemore replaces and installs windshields. Her division has been under pressure to improve its divisional operating income Currently divisions of Eastern Glass are allocated corporate overhead based on cost of goods sold. Jake Myers, the president of the division, has asked Gilpin to reclassify $50,000 of installation labor, which is included in cost of goods sold, as administrative labor, which is not. Doing so will save the division $20,000 in allocated corporate overhead. The labor costs in question involve installation labor provided by trainee employees. Myers argues, “the trainees are not as efficient as regular employees so this is unfairly inflating our cost of goods sold. This is really a cost of training (administrative labor) not part of cost of goods sold.” Gilpin does not see a reason for reclassification of the costs, other than to avoid overhead allocation costs. 1. Describe Gilpin’s ethical dilemma. Required 2. What should Gilpin do if Myers gives her a direct order to reclassify the costs?

Tonya Martin, CMA and controller or the Parts Division of Gunderson Inc., was meeting with Doug Adams, manager of the division. The topic of discussion was the assignment of overhead costs to jobs and their impact on the divisions pricing decisions. Their conversation was as follows: Tonya: Doug, as you know, about 25% of our business is based on government contracts, with the other 75% based on jobs from private sources won through bidding. During the last several years, our private business has declined. We have been losing more bids than usual. After some careful investigation, I have concluded that we are overpricing some jobs because of improper assignment of overhead costs. Some jobs are also being underpriced. Unfortunately, the jobs being overpriced are coming from our higher-volume, labor-intensive products, so we are losing business. Dong: I think I understand. Jobs associated with our high-volume products are being assigned more overhead than they should be receiving. Then when we add our standard 40% markup, we end up with a higher price than our competitors, who assign costs more accurately. Tonya: Exactly. We have two producing departments, one labor-intensive and the other machine-intensive. The labor-intensive department generates much less overhead than the machine-intensive department. Furthermore, virtually all of our high-volume jobs are labor-intensive. We have been using a plantwide rate based on direct labor hours to assign overhead to all jobs. As a result, the high-volume, labor-intensive jobs receive a greater share of the machine-intensive departments overhead than they deserve. This problem can be greatly alleviated by switching to departmental overhead rates. For example, an average high-volume job would be assigned 100,000 of overhead using a plantwide rate and only 70,000 using departmental rates. The change would lower our bidding price on high-volume jobs by an average of 42,000 per job. By increasing the accuracy of our product costing, we can make better pricing decisions and win back much of our private-sector business. Doug: Sounds good. When can you implement the change in overhead rates? Tonya: It wont take long. I can have the new system working within four to six weekscertainly by the start of the new fiscal year. Doug: Hold it. I just thought of a possible complication. As I recall, most of our government contract work is done in the labor-intensive department. This new overhead assignment scheme will push down the cost on the government jobs, and we will lose revenues. They pay us full cost plus our standard markup. This business is not threatened by our current costing procedures, but we cant switch our rates for only the private business. Government auditors would question the lack of consistency in our costing procedures. Tonya: You do have a point. I thought of this issue also. According to my estimates, we will gain more revenues from the private sector than we will lose from our government contracts. Besides, the costs of our government jobs are distorted. In effect, we are overcharging the government. Doug: They dont know that and never would unless we switch our overhead assignment procedures. I think I have the solution. Officially, lets keep our plantwide overhead rate. All of the official records will reflect this overhead costing approach for both our private and government business. Unofficially. I want you to develop a separate set of books that can be used to generate the information we need to prepare competitive bids for our private-sector business. Required: 1. Do you believe that the solution proposed by Doug is ethical? Explain. 2. Suppose that Tonya decides that Dougs solution is not right and objects strongly. Further suppose that, despite Tonyas objections, Doug insists strongly on implementing the action. What should Tonya do?

Hannah Gilpin is the controller ofBlakemore Auto Glass, a division of Eastern Glass and Window. Blakemore replaces and installs windshields.Her division has been under pressure to improve its divisional operating income. Currently,divisions of Eastern Glass are allocated corporate overhead based on cost of goods sold. Jake Myers,the president of the division, has asked Gilpin to reclassify $50,000 of installation labor, which is includedin cost of goods sold, as administrative labor, which is not. Doing so will save the division $20,000 in allocatedcorporate overhead. The labor costs in question involve installation labor provided by traineeemployees. Myers argues, “the trainees are not as efficient as regular employees so this is unfairlyinflating our cost of goods sold. This is really a cost of training (administrative labor) not part of cost ofgoods sold.” Gilpin does not see a reason for reclassification of the costs, other than to avoid overheadallocation costs. Describe Gilpin’s…

Advanced Coding is a software development company that sells specialized practice management software to large professional services firms. Management has decided to analyze certain costs related to sales to determine per-customer profitability and to plan for future sales efforts. These costs include sales commissions and overhead related to the corporate jet expenses. They have determined that $200,000 of overhead costs related to the corporate jet should be assigned to individual customers. Sales representatives are paid a commission of 5% on Gross Profit (sales less costs to develop the software). In relation to overhead costs, the sales staff used the corporate jet at a cost of $1,000 per hour for trips to customers as follows: Customer #1: 50 hours Customer #2: 43 hours Customer #3: 15 hours Customer #4: 8 hours Customer #5: 10 hours Gross profit per customer is as follows: Customer #1: $340,000 Customer #2: $240,000 Customer #3: $60,000 Customer #4: $80,000 Customer #5: $60,000…

Required information [The following information applies to the questions displayed below.] Arctica manufactures snowmobiles and ATVs. These products are made in different departments, and each department has its own manager. Each responsibility performance report includes only those costs that the department manager can control: direct materials, direct labor, supplies used, and utilities. Budget For Year Ended December 31 Direct materials Direct labor Department manager salaries Supplies used Utilities Rent Totals Responsibility Accounting Performance Report Manager, ATV Department For Year Ended December 31 Controllable Costs Snowmobile $ 19,990 10,900 4,800 3,850 410 6,200 $ 46,150 Budgeted $ Prepare a responsibility accounting performance report for the ATV department. (Under budget amounts should be indicated minus sign.) 19,990 $ 10,200 x 3,850 x 6,500 X Actual 19,920 11,210 Direct materials Direct labor Supplies used Utilities Totals $ 40,540 $ 60 *Red text indicates no response…

Arctica manufactures snowmobiles and ATVs. These products are made in different departments, and each department has its own manager. Each responsibility performance report includes only those costs that the department manager can control: direct materials, direct labor, supplies used, and utilities. Budget Actual For Year Ended December 31 Direct materials Direct labor Department manager salaries Snowmobile $ 19,610 10,500 ATV $ 27,600 Snowmobile $ 19,520 ATV $ 28,930 4,400 20,600 5,300 10,770 21,350 4,500 Supplies used Utilities Rent 3,410 370 5,800 910 550 6,400 3,270 340 5,400 4,500 940 510 6,400 Totals $ 44,090 $ 61,360 $ 43,800 $ 62,630 Exercise 24-1 (Algo) Responsibility accounting performance report LO P1 Prepare a responsibility accounting performance report for the snowmobile department. Note: Under budget amounts should be indicated by a minus sign. Responsibility Accounting Performance Report Controllable Costs Manager, Snowmobile Department For Year Ended December 31…

The company is an advertising agency. The company uses an activity-based costing system to allocate overhead costs to its services. Information about the company's activity cost pool rates follows: Activity cost pool Activity rate Clerical costs 16 per administrative assistant hour Legal filing fees 145 per hour of partner time Client meeting time 50 per report Stooge Company was a client of the company. Recently, 5 administrative assistant hours, 3 new ad campaigns, and 10 meeting hours were incurred for the Stooge Company account. Using the activity-based costing system, how much overhead cost would be allocated to the Stooge Company account?

Best Practices, Inc., is a management consulting firm. Its Corporate Division advises private firms on the adoption and use of cost management systems. Government Division consults with state and local governments. Government Division has a client that is interested in implementing an activity-based costing system in its public works department. The division’s head approached the head of Corporate Division about using one of its associates. Corporate Division charges clients $645 per hour for associate services, the same rate other consulting companies charge. The Government Division head complained that it could hire its own associate at an estimated variable cost of $245 per hour, which is what Corporate pays its associates. Suppose that Government Division will charge the client interested in implementing an activity-based costing system by the hour based on cost plus a fixed fee, where the cost is primarily the consultant’s hourly pay. Assume also that Government Division cannot…

Lamothe Solutions is a management consulting firm. Its Business Division advises firms on the adoption and use of financial systems. Civic Division consults with state and local governments. Civic Division has a client that is interested in implementing a new costing system in its public works department. The division's head approached the head of Business Division about using one of its associates. Corporate Division charges clients $815 per hour for associate services, the same rate other consulting companies charge. The Civic Division head complained that it could hire its own associate at an estimated variable cost of $415 per hour, which is what Business pays its associates. Required: a. What is the maximum price that Civic Division should pay? b. What is the maximum transfer price that Business Division should obtain for its services, assuming that it is operating at capacity? c-1. Is there any change in maximum price as indicated in part (a), if Business Division had idle…

The Westfield branch of Security Home Bank submitted the following cost data for last year: Teller wages Assistant branch manager salary Branch manager salary Total Virtually all other costs of the branch-rent, depreciation, utilities, and so on-are organization-sustaining costs that cannot be meaningfully assigned to individual customer transactions such as depositing checks. In addition to the cost data above, the employees of the Westfield branch were interviewed concerning how their time was distributed last year across the activities included in the activity-based costing study. The results of those interviews appear below: Teller wages Assistant branch manager salary Branch manager salary $ 144,000 74,000 90,000 $ 308,000 Activity Opening accounts Processing deposits and withdrawals Processing other customer transactions Distribution of Resource Consumption Across Activities Processing Deposits and Withdrawals 75% 15% 0% Opening Accounts 4% 15% 4% Activity Cost Pool Opening…

Lamothe Solutions is a management consulting firm. Its Business Division advises firms on the adoption and use of financial systems. Civic Division consults with state and local governments. Civic Division has a client that is interested in implementing a new costing system in its public works department. The division's head approached the head of Business Division about using one of its associates. Corporate Division charges clients $770 per hour for associate services, the same rate other consulting companies charge. The Civic Division head complained that it could hire its own associate at an estimated variable cost of $370 per hour, which is what Business pays its associates. Required: a. What is the maximum price that Civic Division should pay? b. What is the maximum transfer price that Business Division should obtain for its services, assuming that it is operating at capacity?

Lamothe Solutions is a management consulting firm. Its Business Division advises firms on the adoption and use of financial systems. Civic Division consults with state and local governments. Civic Division has a client that is interested in implementing a new costing system in its public works department. The division's head approached the head of Business Division about using one of its associates. Corporate Division charges clients $810 per hour for associate services, the same rate other consulting companies charge. The Civic Division head complained that it could hire its own associate at an estimated variable cost of $410 per hour, which is what Business pays its associates. Suppose that Civic Division will charge the client interested in implementing a costing system by the hour based on cost plus a fixed fee, where the cost is primarily the consultant's hourly pay. Assume also that Civic Division cannot hire additional consultants. That is, if it is to do this job, it will need…

Arctica manufactures snowmobiles and ATVs. These products are made in different departments, and each department has its own manager. Each responsibility performance report only includes those costs that the particular department manager can control: raw materials, wages, supplies used, and equipment depreciation. Raw materials Employee wages Dept. manager salary Supplies used Depreciation-Equip. Utilities Rent Totals Snowmobile $21, 190 Controllable Costs: Raw materials Employee wages Supplies used Depreciation-Equipment Totals 12,100 6,000 5,170 7,700 530 7,400 710 8,000 $60,090 $82,280 Budget ATV $29, 200 22,200 6,900 1,070 14,200 Prepare a responsibility accounting report for the ATV department. (Under budget amounts should be Indicated by a minus sign.) Responsibility Accounting Performance Report Dept. Manager, ATV Department Budgeted Amount Combined $ 50,390 34,300 12,900 6,240 21,900 1,240 15,400 $142,370 For the Year Actual Amount Actual ATV Combined $30,690 $ 51,810 12,530…

Solution Summary: The author explains the ethical dilemma of G, stating that she should perform duties ethically and communicate regularly with business associates to avoid conflicts of interest.

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