1. (1) Do you believe that the solution proposed by Doug is ethical? Explain.
2. (2) Suppose that Tonya decides that Doug?s solution is not right and objects strongly. Further suppose that, despite Tonya?s objections, Doug insists strongly on implementing the action. What should Tonya do?

Case 4-60 Assigning Overhead to JobsEthical Issues LO 2 LO 5 Tonya Martin, CMA and controller of the Parts Division of Gunderson Pty Ltd, 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 division's pricing decisions. Their conversation is reproduced below. o 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, labour-intensive products, so we are losing business. o DOUG: 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. o TONYA: Exactly. We have two production departments, one labour-intensive and the other machine-intensive. The labour-intensive department generates much less overhead than the machine-intensive department. Furthermore, virtually all of our high-volume jobs are labourintensive. We have been using a plant-wide rate based on direct labour hours to assign overhead to all jobs. As a result, the highvolume, labour-intensive jobs receive a greater share of the machine-intensive department's 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 plant-wide 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 privatesector business. o DOUG: Sounds good. When can you implement the change in overhead rates? o TONYA: It won't take long. I can have the new system working within four to six weekscertainly by the start of the new financial year. o DOUG: Hold it. I just thought of a possible complication. As I recall, most of our government contract work is done in the labour-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 can't switch our rates for only the private business. Government auditors would question the lack of consistency in our costing procedures. o TONYA: You do have a point. I thought of that issue, too. 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. o DOUG: They don't know that, and never would, unless we switch our overhead assignment procedures. I think I have the solution. Officially, let's keep our plant-wide 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: 2. Do you believe that the solution proposed by Doug is ethical? Explain. 3. Suppose that Tonya decides that Doug's solution is not right and objects strongly. Further suppose that, despite Tonya's objections, Doug insists strongly on implementing the action. What should Tonya do? CASE STUDY 4-60 Assigning Overhead to JobsEthical Issues 1. Do you believe that the solution proposed by Doug is ethical? Explain. Doug's solution to the issue is quite unethical. According to the Institute of Management Accountants's 'Statement of Professional Practice', which outlines the standards of ethical conduct for management accountants, managers should act on the principles of honesty, fairness, objectivity and responsibility (Weygandt, Kimmel, & Kieso, 2014). Doug is acting againist the principle of honesty when he suggests that the government will not know that they are overcharging it. He proposes to maintain the current overhead costing aproach which overcharges the government in the hope that the government will not know. This is unethical and againist the IMA Statement of Professional Practice standard of integrity which requires that professionals have a responsibility to mitigate actual conflict of interest, communicate with bussiness associates regularly to avoid conflict of interest. It is also not ethical for Doug not to disclose confidential information for unethicl or illegal purpose (Donaldson & Werhane, 1979). Doug is not being fair to the government. He is acting againist the principle of faireness by overcharging the government. The government is obliged to the tax payers to make sure that it uses their money wisely and efficiently. This means that government money should not be overspend on avoidable charges which is the exact opposite of Doug's proposal. He is insensitive and doesn't mind the welfare of other business associate in his statement, 'This business is not threatened by our current costing procedures, but we can't switch our rates for only the private business'. The statement is againist the ehtical professional practice of IMA which requires that there be concern for others' well-being. The company should track costs and allocate overhead fairly to ensure that they provide goods/services in a cost-efficient way. The overhead allocation should be fairly distribured between the plant-wide rate and the departmental rate. 2 Suppose that Tonya decides that Doug's solution is not right and objects strongly. Further suppose that, despite Tonya's objections, Doug insists strongly on implementing the action. What should Tonya do? This situation would result to an ethical conflict ("Ethical Issues in Business: Perspectives from the Business Academic Community", 2004). In such a case, Tonya may want to discuss the company's established policies of resolving such conflicts with the division manager, Doug. This can provide a backdrop on which to weigh the pros and cons of Doug's decision to maintain the plant-wide overhead rate. It would give Doug a cleare picture of which decision will be more in line with the company's ethical standards. Tonya can also share his experience about other companies' which have made similar decisions and how they have dealt with the challenge and the outcome of their decisions. Relevant examples like adverse repulcusions of bending accountig rules and acting againist ethical professional practice will help Tonya make sense out of his reasoning and influence Doug to rethink his decision. Tonya should Discuss the issue with the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. However, this contact with the acceptable reviewing authority should be initiated only with Doug's knowledge, assuming he is not involved. Communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate, and therefore Tonya should do this if he believes there is a clear violation of the law. Tonya can also seak to clarify relevant ethical issues like non compliance with the ethical principle of intengrity, competence or faireness by initiating a confidential discussion with an IMA Ethics Counselor or other impartial advisor to obtain a better understanding of possible courses of action towards approaching the issue under discussion with Doug. REFERENCES Brown, M. (1990). Working ethics. San Francisco: Jossey-Bass Publishers. Donaldson, T. & Werhane, P. (1979). Ethical issues in business. Englewood Cliffs, N.J.: Jennings, M. (2006). Business ethics. Mason, Ohio: Thomson/South-Western. Prentice-Hall Nash, L. (1990). Good intentions aside. Boston, Mass.: Harvard Business School Press. Pastin, M. (1986). The hard problems of management. San Francisco, Calif.: Jossey-Bass