Job Costing and Ethics

Old Port Shipyards does work for both the U.S. Navy and private shipping companies. Old Ports major business is renovating ships, which it does at one of two company dry docks referred to by the names of the local towns: Olde Town and Newton.

Data on operations and costs for the two dry docks follow:

	Olde Town	Newton
Overhead cost	$20,000,000	$80,000,000
Direct labor-hours	200,000	200,000

Virtually all dry dock costs consist of depreciation. The Newton dry dock is much newer, so the depreciation on it is much higher. Dry dock overhead is charged to jobs based on direct labor-hours for the specific dock.

Old Port is about to start two jobs, one for the Navy under a cost-plus contract and one for a private shipping company for a fixed fee. Both jobs will require the same number of hours. You have been asked to prepare some costing information. Your supervisor tells you that she is sure the Navy job will be done at Newton and the private job will be done at Olde Town.

Required

a.Compute the overhead rate at the two shipyards.

b.Why do you think your supervisor says that the Navy job will be done at Newton?

c.Is the choice of the production location ethical? Why?