Janice Interiors installs custom interiors for luxury mobile homes. In its most recent negotiation with the union, the firm proposed to share productivity gains in direct labor equally with the union. In return, the union agreed not to demand wage increases. Most union members, however, are skeptical about management's honesty in calculating productivity measures. Nevertheless, union members voted to try the program. Kim Tomas, the management accountant responsible for determining productivity measures, collected these data at the end of the current year:

__________________Current Year_______Prior Year

Number of installations......560..........................500

Direct labor hours........112,000......................99,000

Steve Janice, the CEO, is very anxious to demonstrate the firm's good intentions by showing the labor union a positive result. He suggests to Kim that some of the direct labor hours are actually indirect. For example, some of the labor hours are indirect because these hours cannot be allocated to specific types of work. Following his suggestion, Kim reclassifies 12,000 hours as indirect labor.

Required

1. Evaluate whether Steve's suggestion to reclassify some of the direct labor hours as indirect labor is ethical.

2. Would it be ethical for Kim to modify her calculations?