Scenario

Read the following scenario and then thoughtfully discuss the questions.

Calvin Cabello is a new production analyst at Red Duv Aviation, in the division of the company that manufactures three parts used in small airplane engines. One of his first jobs is to update the predetermined overhead allocation rates for factory production costs. Normally this is done once a year. The production analyst takes into consideration the previous year's actual data along with projected changes and calculates a new rate. Calvin completed his calculations but was confused by what he found. He noticed the activity rate for "maintenance" had almost doubled in one year. Confused by this, he spoke with the factory manager, Priscilla Posey, who proceeded to tell him to just spread the costs out over the other activities. Calvin knew this wasn't right, but had been newly hired and really needed to keep his job.

Later that week while at the local pub, after work, Calvin overheard some employees that worked at Red Duv talking about making extra money on the weekends helping Priscilla restore an old airplane. It occurred to Calvin that the reason the maintenance activity rate was so high, was because Priscilla had been using factory labor, tools, and supplies to have her personal airplane restored.

Discuss

• Besides finding irregularities, such as the case of the unusual increase in this situation, discuss other ways that ABC cost data can be useful for manufacturing companies.
• Discuss the primary standard from the IMA statement of Ethical Professional Practice that Priscilla violated in this scenario.
• Would Priscilla have been able to find this if Traditional Costing methods had been used?
• What would you recommend Calvin do?