About the Download

Case 7-65 ACTIVITY-BASED PRODUCT COSTING AND ETHICAL BEHAVIOR
Consider the following conversation between Leonard Bryner, president and manager
of a firm engaged in job manufacturing, and Chuck Davis, certified management
accountant, the firm’s controller.
Leonard: Chuck, as you know, our firm has been losing market share over the
past three years. We have been losing more and more bids, and I don’t understand
why. At first, I thought that other firms were undercutting simply to gain business,
but after examining some of the public financial reports, I believe that they are making
a reasonable rate of return. I am beginning to believe that our costs and costing
methods are at fault.
Chuck: I can’t agree with that. We have good control over our costs. Like most
firms in our industry, we use a normal job-costing system. I really don’t see any significant
waste in the plant.
Leonard: After talking with some other managers at a recent industrial convention,
I’m not so sure that waste by itself is the issue. They talked about activity-based
management, activity-based costing, and continuous improvement. They mentioned
the use of something called ‘‘activity drivers’’ to assign overhead. They claimed that
these new procedures can help to produce more efficiency in manufacturing, better
control of overhead, and more accurate product costing. A big deal was made of
eliminating activities that added no value. Maybe our bids are too high because these
other firms have found ways to decrease their overhead costs and to increase the accuracy
of their product costing.
Chuck: I doubt it. For one thing, I don’t see how we can increase product costing
accuracy. So many of our costs are indirect costs. Furthermore, everyone uses
some measure of production activity to assign overhead costs. I imagine that what
they are calling ‘‘activity drivers’’ is just some new buzzword for measures of production
volume. Fads in costing come and go. I wouldn’t worry about it. I’ll bet that
our problems with decreasing sales are temporary. You might recall that we experienced
a similar problem about 12 years ago—it was 2 years before it straightened
out.
Required:
1. Do you agree or disagree with Chuck Davis and the advice that he gave Leonard
Bryner? Explain.
2. Was there anything wrong or unethical in the behavior that Chuck Davis displayed?
Explain your reasoning.
3. Do you think that Chuck was well informed—that he was aware of the accounting
implications of ABC and that he knew what was meant by cost drivers? Should he
have been well informed? Review (in Chapter 1) the first category of the standards
of ethical conduct for management accountants. Do any of these standards apply in
Chuck’s case?

Save For Later

has been added to your cart!

have been added to your cart!

You must log in and be a buyer of this download to submit a review.