Chapter 3

Cost Accounting Systems:

Job Order Costing

QUESTIONS
1. A cost accounting system is any orderly method of developing product cost or service
cost information. Typically, some amount of cost is accumulated and related to some
unit of activity or accomplishment.

2. Virtually all types of entities use cost accounting systems, including service firms
and governmental units; for example, hospitals, insurance companies,
municipalities, and professional service organizations.

3. A job order costing system accumulates direct material, direct labor, and
manufacturing overhead separately for each job or product. It is used by companies
in which production is characterized by a series of different products or jobs
undertaken either to fill specific orders or to produce a general stock. A process
costing system accumulates direct material, direct labor, and manufacturing
overhead by production department or process. It is used by companies that
produce a large volume of product using a continual flow manufacturing process.

4. Types of companies that would use job order costing are manufacturers of consumer
products, construction companies, printing companies, and professional service
companies.

5. Predetermined manufacturing overhead rates are so named because they (1) are
predetermined (calculated prior to the beginning of each accounting period), (2) deal
with production overhead (all manufacturing costs other than direct material and
direct labor), and (3) are usually stated in terms of a rate (such as $20 per direct labor
hour).

6. The predetermined manufacturing overhead rate is determined by dividing the

estimated total manufacturing overhead cost for the year by the estimated utilization
of the factory productive capacity for the year. The factory productive capacity is
usually measured in terms of direct labor hours, machine hours, or direct labor cost.

©Cambridge Business Publishers, 2024

Solutions Manual, Chapter 3 3-1
7. Most firms do not incur total manufacturing overhead in proportion to the level of
production volume. Therefore, if actual manufacturing overhead for the month were
assigned to that period's production, units of product produced in high-volume months
would have relatively little overhead allocated to them; the reverse would be true for
units produced in low-volume months. Use of an annual predetermined manufacturing
overhead rate assigns each unit of product an annual average amount of overhead.

8.
Total cost of job 541
Direct material $3,000
Direct labor (60 x $10) 600
Manufacturing overhead (60 x $25) 1,500
$5,100

9.
Total cost of job 783
Direct material $5,000
Direct labor 8,000
Manufacturing overhead applied ($8,000 x 140%) 11,200
$24,200

Unit cost = $24,200/1,000 = $24.20

10. Product costs are accumulated in three categories: materials inventory, direct labor,
and manufacturing overhead incurred. Based on materials requisitions, the cost of
direct material is assigned to work in process and the cost of indirect material to
manufacturing overhead. The direct labor portion of labor is assigned to work in
process; the indirect labor portion is assigned to manufacturing overhead.
Manufacturing overhead is then applied to work in process using a predetermined
overhead rate. The total cost in work in process is then allocated to finished goods
and ending work in process inventories. The cost of finished units becomes an
addition to finished goods inventory.

11. a. Bill of materials

b. Materials requisition

c. Time record

d. Job order cost sheet

©Cambridge Business Publishers, 2024

3-2 Managerial Accounting for Undergraduates, 3rd Edition
12. Within a custom manufacturing firm, such as Fezzari:

a. A sales order is created when a customer places and order for a specific item.
Based on this sales order, the assembly department would create a production
order directing the assembly employees to manufacture the item in accordance with
the customer’s specifications.

b. A bill of materials is a list of each required part for the particular item to be
manufactured. The bill of materials is used to create a materials requisition,
requesting that the components on the bill of materials be pulled from inventory and
brought to the assembly station.

c. A job cost sheet should include specifications of the job number; customer’s name
(if relevant); starting, completion, and delivery dates; and amounts and reference
data for direct material, direct labor, and overhead costs.

13. The sale of a manufactured product should be recorded at its selling price by a debit to
Cash or Accounts Receivable and a credit to Sales. A second entry should be made at
its cost amount by debiting Cost of Goods Sold and crediting Finished Goods Inventory.
(This assumes perpetual inventory procedures.)

14. Overhead has been over-applied in January. A net credit balance in the Manufacturing
Overhead account indicates that more overhead has been applied (credits) than incurred
(debits). During interim operating periods, such as that represented in the January
statement, reasonable amounts of under- and over-applied overhead are anticipated
when a predetermined overhead rate is used.

15.
Manufacturing overhead applied ($82,000 x 150%) $123,000
Manufacturing overhead incurred 120,000
Over-applied overhead $3,000

16. Manufacturing overhead cost for one department might be significantly different from
that of another department. The activity basis in one department might be different from
that of another. One department may be labor intensive and another department may be
machine intensive.

17. Product A uses relatively fewer direct labor hours than other products. Under the plant-
wide rate, Product A would have received a relatively smaller allocation based on labor
hours. When the basis for overhead allocation changed from labor hours, Product A’s
overhead must have increased because it consumes more overhead based on the
departments’ individual capacity measures.

©Cambridge Business Publishers, 2024

Solutions Manual, Chapter 3 3-3
 SHORT EXERCISES

SE3-1.
(LO1)

c. A tailor

SE3-2.
(LO2)

b. Statements I and IV would apply. The factory overhead rate is likely increased as
expenses such as depreciation have increased. The increase in automation makes it
more difficult to respond to economic changes as the company cannot simply layoff or
hire workers. Statements II and III are incorrect as machine hours would be more
appropriate and Haney will still be able to calculate labor variances.

SE3-3.
(LO2)

a. Valley’s predetermined overhead application rate is $2.09.

(Indirect material + Indirect labor + Utilities) / Production

($1,000 + $10,000 + $12,000) / 11,000 = $2.09

SE3-4.
(LO2)

Baldwin’s annual budgeted overhead is $600,000 calculated as follows.

Overhead cost per unit

[$4.30 – ($1,000 DM ÷ 1,000) – ($1,500 DL ÷ 1,000)] = $1.80
Overhead hours per unit (450 ÷ 1,000) = 0.45 hr.
Overhead budget per unit ($1.80 ÷ 0.45) = $4.00
Total overhead budget (150,000 x $4.00) = $600,000

©Cambridge Business Publishers, 2024

3-4 Managerial Accounting for Undergraduates, 3rd Edition
SE3-5.
(LO4)

b. Direct materials used for #720 $1,200

Direct labor incurred for #720 850
Overhead applied to #720 1,000
Total $3,050

(Indirect labor of $250 would be included in the overhead.)

SE3-6.
(LO4)

b. Budgeted direct labor cost for the year $375,000

Divided by budgeted direct labor cost per hour $25
Equals budgeted labor hours 15,000

Budgeted overhead for the year $150,000

Divided by budgeted labor hours 15,000
Equals predetermined overhead rate $10

Actual labor hours for November $ 1,100

Multiplied by predetermined overhead rate $10
Equals applied overhead $ 11,000
Less actual overhead for November 10,000
Equals over-applied overhead $ 1,000

SE3-7.
(LO4)

b. Beg. finished goods + Cost of goods manufactured - Ending finished goods = Cost of
goods sold.

$100,000 + $700,000 - $200,000 = $600,000

SE3-8.
(LO6)

b. Total overhead applied to Job #231 is $303 as shown below.

Tooling overhead/hr. $8,625 ÷ 460 hours = $18.75

Fabricating overhead/hr. $16,120 ÷ 620 hours = $26.00
Job #231 overhead ($18.75 x 12) + ($26.00 x 3) = $303.00

©Cambridge Business Publishers, 2024

Solutions Manual, Chapter 3 3-5
 EXERCISES—SET A

E3-1A. Calculate and Use Overhead Rate

(LO2)

Total budgeted direct labor hours: $200,000 / $20 = 10,000 hrs.

Overhead cost/direct labor hour: $450,000 / 10,000 = $45 per hr.

Overhead cost for 40 hours: 40 x $45 = $1,800

E3-2A. Calculate and Use Overhead Rate

(LO2)

Factory overhead/direct labor cost: $450,000 / $200,000 = $2.25 per direct labor dollar.

Overhead cost for $1,000: $1,000 x $2.25 = $2,250

E3-3A. Calculate and Use Overhead Rate

(LO2)

Total manufacturing overhead costs:

Indirect material $12,000
Indirect labor 22,000
Factory administration 16,000
Other manufacturing overhead 80,000
$130,000

Direct labor hours: $200,000/$10 = 20,000 direct labor hours

a. 1. $130,000/20,000 = $6.50 per direct labor hour

2. $130,000/$200,000 = 65% of direct labor costs
3. $130,000/40,000 = $3.25 per machine hour

b. 1. 16 hrs. x $6.50 = $104

2. $150 x 65% = $97.50
3. 40 hrs. x $3.25 = $130

©Cambridge Business Publishers, 2024

3-6 Managerial Accounting for Undergraduates, 3rd Edition
E3-4A. Flow of Product Costs through Accounts
(LO3)

a. Materials Inventory
Accounts Payable

b. Manufacturing Overhead (for indirect labor)

Wages Payable

c. Work in Process Inventory (for direct material)

Manufacturing Overhead (for indirect material)
Materials Inventory

d. Work in Process Inventory (for direct labor)

Manufacturing Overhead (for indirect labor)
Wages Payable

e. Manufacturing Overhead
Accumulated Depreciation —Factory
Property Taxes Payable

f. Work in Process Inventory

Manufacturing Overhead

g. Finished Goods Inventory

Work in Process Inventory

h. Cost of Goods Sold

Finished Goods Inventory

Accounts Receivable
Sales

Wages
i. Wages Payable
Cash
To pay wages earned.

©Cambridge Business Publishers, 2024

Solutions Manual, Chapter 3 3-7
E3-5A. Job Order Cost Sheets
(LO3)

Transaction or Event Document

a. Purchase of materials Vendor's invoice, receiving report

b. Record wages payable Time records

c. Requisition of materials Materials requisition

d. Assignment of direct and indirect Time records

labor costs

e. Record other manufacturing Various depreciation and property tax

overhead incurred schedules

f. Application of manufacturing The calculation of the predetermined

overhead manufacturing overhead rate, job order
cost sheets

g. Completion of production Job order cost sheets

h. Sale of products Sales invoices

E3-6A. Calculate and Use Overhead Rate

(LO2, 4)

a. $360,000/$180,000 = 200% of direct labor costs

b. Work in Process Inventory 22,000

Consulting Overhead 22,000
[$11,000 x 200% = $22,000]

c. Overhead applied $22,000

Overhead incurred 19,500
Over-applied overhead $2,500

©Cambridge Business Publishers, 2024

3-8 Managerial Accounting for Undergraduates, 3rd Edition
E3-7A. Calculate and Use Overhead Rate
(LO2, 4)

a. $180,000 / $9/hr. = 20,000 hrs.

$360,000/20,000 hrs. = $18.00 per direct labor hour

b. Work in Process Inventory 21,600

Consulting Overhead 21,600
[1,200 hrs. x $18.00 = $21,600]

c. Overhead applied $21,600

Overhead incurred 19,500
Over-applied overhead $2,100

E3-8A. Applied vs. Actual Manufacturing Overhead

(LO4)

Pre-determined overhead rate: $250,000 ÷ 2,000 hours = $125

Applied overhead: 2,400 hours x $125 = $300,000

Over-applied overhead: Actual – Applied = $275,000 - $300,000 = $25,000 over-applied

E3-9A. Applied vs. Actual Manufacturing Overhead

(LO4)

a. Manufacturing Overhead
Direct Labor Incurred Applied at 140%
Work in process $40,000 $56,000
Finished goods 20,000 28,000
Cost of goods sold 140,000 196,000
$200,000 $280,000

Under-applied overhead = $315,000 - $280,000 = $35,000

b. Work in Process inventory 7,000

Finished Goods Inventory 3,500
Cost of Goods Sold 24,500
Manufacturing Overhead 35,000
To transfer under-applied overhead to work in process inventory,
finished goods inventory, and cost of goods sold as follows:
56/280 x $35,000 = $ 7,000
28/280 x $35,000 = 3,500
196/280 x $35,000 = 24,500
$35,000

©Cambridge Business Publishers, 2024

Solutions Manual, Chapter 3 3-9
E3-10A. Perpetual Inventories
(LO4)

a. Finished goods inventory at May 1:

Job 1 $7,300
Job 2 5,400
$12,700

Finished goods inventory at May 31:

Job 4 ($3,600 + $4,800) $8,400

b. Work in process inventory at May 1:

May 1 balances of:
Job 3 $2,900
Job 4 3,600
$6,500

Work in process inventory at May 31:

Job 5 $2,600
Job 6 3,800
$6,400

c. Cost of goods sold:

(Jobs shipped in May)
Job 1 $7,300
Job 2 5,400
Job 3 ($2,900 + $5,700) 8,600
$21,300

©Cambridge Business Publishers, 2024

3-10 Managerial Accounting for Undergraduates, 3rd Edition
E3-11A. Finished Goods and Cost of Goods Sold
(LO4)

a. Total cost charged to work in process $131,000

Jobs completed:
107 $28,000
108 55,000
109 25,000 108,000
Work in process, June 30 $ 23,000

Entry:
Finished Goods Inventory 108,000
Work in Process Inventory 108,000
To record completed production.

b. Cost of Goods Sold 28,000

Finished Goods Inventory 28,000
To transfer cost of Job 107 to expense.

Accounts Receivable 40,000

Sales 40,000
To record sale of Job 107.

E3-12A. Preparing a Job Order Cost Sheet

(LO4)

$27,500/$20,000 = 135% overhead rate

Total direct labor 20,000

Total project overhead 27,000
$47,000
Less cost of completed services (42,253)
Labor and overhead in process for Jones Audit $ 4,747

$20,000 direct labor + $27,000 project overhead = $47,000

100% direct labor + 135% project overhead = 235%

$4,747/235% = $2,020 direct labor
$2,020 x 135% = $2,727 project overhead

Job Order Cost Sheet – Jones Audit (in process)

Direct labor 2,020
Project overhead 2,727
Total cost $4,747
©Cambridge Business Publishers, 2024
Solutions Manual, Chapter 3 3-11
©Cambridge Business Publishers, 2024
3-12 Managerial Accounting for Undergraduates, 3rd Edition
 EXERCISES—SET B

E3-1B. Calculate and Use Overhead Rate

(LO2)

Total budgeted direct labor hours: $500,000 / $25 = 20,000 hrs.

Overhead cost/direct labor hour: $300,000 / 20,000 = $15 per hr.

Overhead cost for 100 hours: 100 x $15 = $1,500

E3-2B. Calculate and Use Overhead Rate

(LO2)

Factory overhead/direct labor cost: $300,000 ÷ $500,000 = $0.60 per direct labor dollar.

Overhead cost for $3,000: $3,000 x $0.60 = $1,800

E3-3B. Calculate and Use Manufacturing Overhead Rate

(LO2)

Total manufacturing overhead costs:

Indirect material $7,000
Indirect labor 12,000
Factory administration 13,000
Other manufacturing overhead 28,000
$60,000

Direct labor hours: $120,000/$12 = 10,000 direct labor hours

a. 1. $60,000/10,000 = $6.00 per direct labor hour

2. $60,000/$120,000 = 50.00% of direct labor costs
3. $60,000/30,000 = $2.00 per machine hour

b. 1. 9 hrs. x $6.00 = $54.00

2. $100 x 50.00% = $50.00
3. 32 hrs. x $2.00 = $64.00

©Cambridge Business Publishers, 2024

Solutions Manual, Chapter 3 3-13
E3-4B. Flow of Product Costs through Accounts
(LO3)

Note: Explanations of the journal entries describe transactions or the procedures that are
indicated.

a. Materials Inventory
Accounts Payable (or Cash)
Purchase of materials.

b. Manufacturing Overhead (for indirect labor)

Wages Payable
To record employee wages for indirect labor earned.

c. Work in Process Inventory (for direct material)

Manufacturing Overhead (for indirect material)
Materials Inventory
To record requisition of direct material and indirect material.

d. Work in Process Inventory (for direct labor)

Manufacturing Overhead (for indirect labor)
Wages Payable
To assign direct and indirect labor costs.

e. Manufacturing Overhead
Other Accounts (cash, prepaid assets, accrued liabilities, and
accumulated depreciation)
To record other manufacturing overhead incurred.

f. Work in Process Inventory

Manufacturing Overhead
To record manufacturing overhead applied.

g. Finished Goods Inventory

Work in Process Inventory
To record completed production.

©Cambridge Business Publishers, 2024

3-14 Managerial Accounting for Undergraduates, 3rd Edition
 h. Cost of Goods Sold
Finished Goods Inventory
To record cost of goods sold.

Accounts Receivable
Sales
To record sale of finished goods

Wages
i. Wages Payable
Cash
To pay wages earned.

E3-5B. Job Order Cost Sheets

(LO3)

Transaction or Event Document

a. Purchase of materials Vendor's invoice, receiving report

b. Record employee wages Time record

c. Requisition of materials Materials requisition

d. Assignment of employee wage costs Factory payroll analysis (or summary of

time records)

e. Record other manufacturing Various invoices, accrual analyses,

overhead incurred depreciation and amortization
schedules

f. Application of manufacturing The calculation of the predetermined

overhead manufacturing overhead rate, job cost
sheets

g. Completion of production Job order cost sheets

h. Sale of products Sales invoices

©Cambridge Business Publishers, 2024

Solutions Manual, Chapter 3 3-15
E3-6B. Calculate and Use Overhead Rate
(LO2, 4)

a. $486,000/$324,000 = 150% of direct labor costs

b. Work in Process Inventory 33,000

Consulting Overhead 33,000
[$22,000 x 150% = $33,000]

c. Overhead applied $33,000

Overhead incurred 29,000
Over-applied overhead $4,000

E3-7B. Calculate and Use Overhead Rate

(LO2, 4)

a. $324,000 / $9/hr. = 36,000 hrs.

$486,000/36,000 hrs. = $13.50 per direct labor hour

b. Work in Process Inventory 32,400

Consulting Overhead 32,400
(2,400 hrs. x $13.50 = $32,400)

c. Overhead applied $32,400

Overhead incurred 29,000
Over-applied overhead $ 3,400

E3-8B. Applied vs. Actual Manufacturing Overhead

(LO4)

Pre-determined overhead rate: $500,000 ÷ 25,000 hours = $20

Applied overhead: 24,000 hours x $20 = $480,000

Over-applied overhead: Actual – Applied = $505,000 - $480,000 = $25,000 under-applied

©Cambridge Business Publishers, 2024

3-16 Managerial Accounting for Undergraduates, 3rd Edition
E3-9B. Applied vs. Actual Manufacturing Overhead
(LO4)

a. Manufacturing Overhead
Direct Labor Incurred Applied at 130%
Work in process $30,000 $39,000
Finished goods 20,000 26,000
Cost of goods sold 150,000 195,000
$200,000 $260,000

Over-applied overhead = $260,000 - $210,000 = $50,000

b. Manufacturing Overhead 50,000

Work in Process inventory 7,500
Finished Goods Inventory 5,000
Cost of Goods Sold 37,500
To transfer over-applied overhead to work in process inventory,
finished goods inventory, and cost of goods sold as follows:
39/260 x $50,000 = $ 7,500
26/260 x $50,000 = 5,000
195/260 x $50,000 = 37,500
$50,000

E3-10B. Perpetual Inventories

(LO4)

a. Finished goods inventory at October 1:

Job 1 $9,000
Job 2 6,600
$15,600

Finished goods inventory at October 31:

Job 4 ($4,400 + $5,700) $10,100

b. Work in process inventory at October 1:

October 1 balances of:
Job 3 $3,500
Job 4 4,400
$7,900

Work in process inventory at October 31:

Job 5 $3,200
Job 6 4,900

©Cambridge Business Publishers, 2024

Solutions Manual, Chapter 3 3-17
 c. Cost of goods sold:
(Jobs shipped in October)
Job 1 $9,000
Job 2 6,600
Job 3 ($3,500 + $7,100) 10,600
$26,200

E3-11. Finished Goods and Cost of Goods Sold

(LO4)

a. Total cost charged to work in process $90,000

Jobs completed:
317 $31,000
318 18,000
319 29,000 78,000
Work in process, August 31 $12,000

Entry:
Finished Goods Inventory 78,000
Work in Process Inventory 78,000
To record completed production.

b. Cost of Goods Sold 31,000

Finished Goods Inventory 31,000
To transfer cost of Job 317 to expense.

Accounts Receivable 45,000

Sales 45,000
To record sale of Job 317.

©Cambridge Business Publishers, 2024

3-18 Managerial Accounting for Undergraduates, 3rd Edition
E3-12B. Preparing a Job Order Cost Sheet
(LO4)

$57,600/$38,400 = 150% overhead rate

Total direct labor 38,400

Total project overhead 57,600
$96,000
Less cost of completed services 84,000
Labor and overhead in process for Davis Audit $12,000

100% direct labor + 150% project overhead = 250%

$12,000/250% = $4,800 direct labor

$4,800 x 150% = $7,200 project overhead

Cost Sheet – Davis Audit (in process)

Direct labor 4,800
Project overhead 7,200
Total cost $12,000

©Cambridge Business Publishers, 2024

Solutions Manual, Chapter 3 3-19
 PROBLEMS—SET A

P3-1A. Determine and Use Overhead Rate

(LO2, 3)

a. Total manufacturing overhead expected: $202,500

Total direct labor hours = $162,000/$12 per hr. = 13,500 hrs.

Predetermined overhead rate = $202,500/13,500 hrs.

= $15 per direct labor hour

b
. Work in Process 22,500

Overhead 22,500
To apply overhead at a rate of $15/direct labor hour
[$15 x 1,500 hrs. = $22,500].

c. Total direct labor/Rate per direct labor hour = $180/$12 = 15 hrs.

15 hrs. x $15 per hr. = $225

P3-2A. Determine and Use Overhead Rate

(LO2, 4)

a. Total materials requisitioned $105,000

Less: Direct material charged to Work in Process Inventory 95,000
Apparent indirect material requisitioned $ 10,000

b. Total wages payable (see credit to Wages Payable) $185,000

Less: Direct labor charged to Work in Process Inventory 151,500
Apparent indirect labor cost incurred $ 33,500

c. Manufacturing overhead rate = Overhead applied/Direct labor incurred

= $166,650/$151,500 = 110% of direct labor costs

d. Overhead applied in February $166,650

Overhead incurred in February 163,350
Over-applied overhead $ 3,300

e. February 1, balance indicates amount over-applied in January $11,600

Amount over-applied in February [see part (d), above] 3,300
Year-to-date amount over-applied $14,900

f. The debit to Finished Goods Inventory (or the credit to Work in Process Inventory) indicates
the cost of completed production is $375,000.

g. The credit to Finished Goods Inventory (the offsetting debit would be to Cost of Goods Sold)
indicates the cost of goods sold is $386,000.
©Cambridge Business Publishers, 2024
3-20 Managerial Accounting for Undergraduates, 3rd Edition
 ©Cambridge Business Publishers, 2024
Solutions Manual, Chapter 3 3-21
 PROBLEMS—SET B

P3-1B. Determine and Use Consulting Rate

(LO2, 3)

a. Total overhead expected: $312,000

Total direct labor hours = $336,000/$14 per hr. = 24,000 hrs.

Predetermined overhead rate = $312,000/24,000 hrs. = $13 per direct labor hour

b
. Work in Process 45,500

Overhead 45,500
To apply overhead at a rate of $13/direct labor hour
[$13 x 3,500 hrs. = $45,500].

c. $532/$14 per hr. = 38 hrs.

38 hrs. x $13 per hr. = $494

©Cambridge Business Publishers, 2024

3-22 Managerial Accounting for Undergraduates, 3rd Edition
 EXTENDING YOUR KNOWLEDGE

EYK3-1. Business Decision Case

a
. Direct material:
Building permits $1,500.00
Airline travel and motel 865.00
Direct labor:
Senior engineers [(52 x $22) + (84 x $18)] 2,656.00
Associate engineers [(106 x $15) + (44 x $12)] 2,118.00
Overhead [(52 + 84 + 106 + 44) x $5] 1,430.00
Total project cost $8,569.00
Cost-plus percentage x 140%
Total amount billed $11,996.60

b. $11,996.60 - $8,569.00 = $3,427.60

EYK3-2. Corporate Responsibility Case

1. These types of programs are part of CH2M Hill’s core values and may be considered
important even if they do not provide financial benefits.

2. Without sufficient engineers the company would suffer financially. Increasing the supply of
engineers, even if these children work for other companies, will increase to engineers
available to CH2M Hill.

3. Increasing the supply of engineers should reduce wages rather than increase the wages
relative to what they would be with a shortage.

4. Programs such as these help burnish the firm’s reputation.

5. Excellent reputations may increase the chances of obtaining large project engagements,
especially with government clients.

©Cambridge Business Publishers, 2024

Solutions Manual, Chapter 3 3-23
EYK3-3. Ethics Case

Discussion of this case should include the following ethical considerations:

1. Fairness to other customers. Taking an order at a significantly reduced price (regardless of

whether the company has excess capacity) raises the question whether this approach is
fair to the existing customers, many of whom may have been good customers for many
years. While this is probably not unethical, it may not be smart business. The existing
customers may become aware of this order and demand that the prices on their contracts
be reduced.

2. Fairness to other sales people. Altering the accounting for a particular order (reducing the
overhead application rate by 60%) is being done primarily to make a particular order
appear profitable even though it is not when regular procedures are used. This will result
in Starling receiving a bonus. Is this fair to the other salespeople?

3. Fairness to the controller. Asking the controller to handle the contract and keep the
accounting confidential places pressure on the controller. Is it reasonable to ask the
controller to violate existing accounting procedures? Is it fair to ask the controller to be part
of a three-person secret concerning a bonus that was not earned according to the existing
rules that the other salespeople are being asked to follow?

©Cambridge Business Publishers, 2024

3-24 Managerial Accounting for Undergraduates, 3rd Edition