Posted: December 13th, 2016
Aero Systems is a manufacturer of airplane parts and engines for a variety of military and commercial aircraft. It has two production departments. Department A is machine intense; Department B is labor intense. Aero Systems has adopted a traditional plantwide rate using direct labor hour based overhead allocation system. The company conducted a pilot study using dept overhead rate costing system. This system used two overhead allocation bases; machine hours for Dept A and direct labor hours for Dept B. The study showed that the system which would be more accurate and timely would will assign lower costs to the government jobs and higher costs to the company’s nongovernment jobs and undercosted private jobs. On hearing of this the top management has decided to scrap plans for adopting the new departmental overhead rate costing system because the government jobs constitute 40% of the business and the new system would reduce the price and the profits.
As the accountant participating in this pilot study project which is your responsibility when your hear of the decision to cancel the plans? What would you do?
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