High Fly manufactures airplane parts and engines for various military and civilian aircraft. The company is the sole provider of rocket engines for the U.S. military. The price represents the full cost plus a 5% markup. High Fly's current cost system is a direct labor hour-based overhead allocation system.

Recently, the company conducted a pilot study on the feasibility of using an ABC system. The study shows that the new ABC system, while more accurate and timely, will assign a lower cost to the rocket engines and a higher cost to the company's other products. The current direct labor-based costing system apparently overcosts the rocket engines and undercosts the other products. On hearing of this, upper management decided to scrap the plans to adopt the ABC system because its rocket engine business with the military is significant, and the reduced cost would lower the price and, thus, the company's total profits.

• Explain why an ABC system may result in different cost allocations compared with a simple allocation basis such as direct labor hours.
• Identify any ethical issues or considerations that should be brought to managementsattention.
• Discuss managements ethical responsibilities to fairly cost and price products, including any inherent limitations or controls related to pricing.