Ethical Implications in Overhead Allocation

Compute the billing for September/October 2017 for Russell Brady and Collin Bennet allocating OH using Activity Based Costing (ABC) with the data provided by Dinesh. 

Ethical Implications in Overhead Allocation 

Organizations incur the cost to achieve a specific objective such as to produce or consume, among others. Resources are acquired by the organization and transformed in a way to deliver services and products to the customers. The incurred costs are assigned to the units of product or service either directly or indirectly. However, allocation of costs involves various ethical issues which result in undercharging or overcharging. Failure to understand the finance and accounting process in cost accounting is an inducement for the unethical personnel in the organization to manipulate the system. 

If I were in Dinesh’s position, I would attend the partner’s meeting to present my report to Tom and Kate. Attending the meeting would be ethical, and the report would provide accurate and factual information to the users as well as the management. The report will be beneficial to the organization and will help to determine the nominal price of the products. The report will also help the organization to maintain appropriate professional relations with the customers. Both Tom and Kate will have an understanding of the role of ethics in overhead allocation. They will also be able to compare and contrast single cost driver overhead allocation and the Activity- Based Costing (ABC). 

Failure to attend the meeting would be unethical and would result in a loss of client where Russell would leave due to overbilling. However, there will be various disadvantages of attending the meeting and presenting the report to Kate and Tom. One of the cons is that the management might decide to fire John, who was in charge of the account of Russell. According to the ethical value framework, individuals should avoid actions that can cause emotional and physical suffering to others (Small & Lew, 2019) . In this case, John might be fired, which would result in suffering and pain. 

As explained by Dinesh in the meeting, traditional costing is simple but less accurate than Activity-Based Costing. On the other hand, Activity -Based Costing is complex but more accurate since it provides an accurate breakdown of indirect costs. The best course of action to be taken by the firm is to shift from single cost driver overhead allocation to Activity Based Costing. The reason is that ABC uses various cost drivers, tracing costs to different areas such as managerial responsibility, customers and departments. The consequences of shifting to this method will be better decision making by the management. The controller and account executives will experience changes since the new process is complex, unlike the previous process which was simple. 

The ABC method will solve the problem of undercharging and overcharging, therefore, billing the correct amount to both Collin and Russell. I think this is the best method to be used by the firm since it has more benefits than the traditional costing method. In the case where Tom decides to dismiss John and continue using the traditional costing method, Dinesh should not do something. The reason is that being ethical in accounting deals with morals. It is clear that overcharging is unethical and Tom being one of the cofounders of the firm, he can make decisions in whatever way he chooses (Jackson et al., 2016) . 

In conclusion, ethics plays a fundamental role in the allocation of overheads in a firm. Individuals are required to reason ethically to reduce pain and suffering, among others. By attending the meeting and presenting the report, Tom and Kate were able to understand the causes of overcharging and undercharging. 

References 

Jackson, A., Simmons, M., Brummel, B., & Entringer, A. (2016). Appropriate Training Should Turn Ethical Reasoning into Ethical Practice.  Journal Of Business Ethics Education ,  13 , 373-392. https://doi.org/10.5840/jbee20161317 

Small, C., & Lew, C. (2019). Mindfulness, Moral Reasoning and Responsibility: Towards Virtue in Ethical Decision-Making.  Journal Of Business Ethics . https://doi.org/10.1007/s10551-019-04272-y