The fact that companies produce a wide range of products in the modern era, which makes the direct labor represent a small percentage of costs has made the traditional cost systems unable to charge overhead to ascertain accurate product costs. However, the introduction of activity-based cost (ABC) system has several uses to the manufacturing companies. Apart from identifying irregularities in the factory's production cost, the ABC data can be beneficial to managers as it improves their decision-making through the provision of more reliable product cost information. Also, ABC data can help the manufacturing company in fixing selling prices of products as more accurate product data is available to compare and make pricing decisions. Besides, the data helps in tracking the cost of activities and work processes and identifying the root causes of poor financial performance (Shil & Pramanik, 2013).
Priscila violated integrity standards of IMA that she should have rather upheld. Specifically, Priscila placed her personal interests above the integrity of the professional thus contributing negatively to the ethical culture (IMA, n.d.). Besides, Priscila engaged in conduct that ethically sabotaged the way Calvin carried out his duties by promoting lies and unethical practices. If traditional costing methods had been used in Red Duv company, Pricilla would not have been able to use the factory labor, supplies, and tools for her airplane and still direct Calvin to spread the cost over other activities. This is because unlike in ABC system where expenses are grouped into different cost pools depending on the factors that drive the costs, in traditional costing method each expensive is calculated alone and later added and divided by the total direct labor hours. Therefore, Priscila would not be able to spread the expenses for what she consumed for her airplane, to other activities.
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Finally, I would advise Calvin to uphold IMA standards by communicating the right information to stakeholders and contribute to an ethical culture in the Red Duv by placing the integrity of his profession above his job interests. Even if it means being fired for speaking the truth, then let it be as long as he upholds integrity and credibility in his duties.
References
Shil, N. C., & Pramanik, A. K. (2013). Application of Activity Based Costing in manufacturing companies in Bangladesh: A survey-based study. The USV Annals of economics and public administration , 12 (1 (15)), 170-182.
IMA (Institute of Management Accounting) (n.d.). IMA Statement of Ethical Professional Practice. Retrieved from https://www.imanet.org//media/b6fbeeb74d964e6c9fe654c48456e61f.ashx
