Job Costing and Ethics Old Port Shipyards does work for both the U.S. Navy and p
ID: 2577672 • Letter: J
Question
Job Costing and Ethics
Old Port Shipyards does work for both the U.S. Navy and private shipping companies. Old Port’s major business is renovating ships, which it does at one of two company dry docks referred to by the names of the local towns: Olde Town and Newton.
Data on operations and costs for the two dry docks follow:
Virtually all dry dock costs consist of depreciation. The Newton dry dock is much newer, so the depreciation on it is much higher. Dry dock overhead is charged to jobs based on direct labor-hours for the specific dock.
Old Port is about to start two jobs, one for the Navy under a cost-plus contract and one for a private shipping company for a fixed fee. Both jobs will require the same number of hours. You have been asked to prepare some costing information. Your supervisor tells you that she is sure the Navy job will be done at Newton and the private job will be done at Olde Town.
Required
a.Compute the overhead rate at the two shipyards.
b.Why do you think your supervisor says that the Navy job will be done at Newton?
c.Is the choice of the production location ethical? Why?
Olde Town Newton Overhead cost $20,000,000 $80,000,000 Direct labor-hours 200,000 200,000Explanation / Answer
Overhead Rate = Overhead Cost / Direct labor hours
Olde Town = $20,000,000 / 200,000 = $100 per labor hour
Newton = $80,000,000 / 200,000 = $400 per labor hour
(b). Supervisor is saying that Nevy job will be done at Newton.
As we can see that Navy job is based cost plus contract. It means if cost will be high, profit margin will be high. As per part (a) of the question, cost at Newton will be high based on hours. It is also described that both the jobs will take the same time, so there will be no issue of time.
So the supervisor thinks that by preparing Navy job at Newton will increase the profit. That is why she is saying that Navy job will be done at Newton.
(c) Choice of Production location
Choiceof production location is not ethical, as the cost computed by this method is not correct. Location expenses are fixed and allocated based ib labor hours. As we know that, this place is new and higher deprecation will be charged. This expense is not related to job.
So location based on profit should not be choosen. Other factors like job's actual cost (excluding location cost) should be taken into account for correct decision.
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