Question:
Ethics and Choice of Accounting Methods
Bob's Baskets, Inc., manufactures and sells two types of baskets, deluxe and standard. Last year, Bob's Baskets had the following costs and revenues:
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BOB'S BASKETS, INC.
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Income Statement
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Deluxe
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Standard
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Total
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Revenue
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$216,000
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$240,000
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$ 456,000
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Direct materials
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20,000
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20,000
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40,000
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Direct labor
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48,000
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72,000
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120,000
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Overhead costs Administration
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30,000
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Production setup
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60,000
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Quality control
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30,000
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Distribution
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24,000
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Operating profit
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$ 152,000
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Bob's Baskets currently uses labor costs to allocate all overhead but is considering implementing an activity-based costing system. After interviewing the sales and production staff, management decides to allocate administrative costs on the basis of direct labor costs but to use the following bases to allocate the remaining overhead:
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Activity Level
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Activity
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Cost Driver
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Deluxe
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Standard
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Setting up
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Number of production runs
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20
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10
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Performing quality control
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Number of inspections
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60
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20
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Distribution
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Number of units shipped
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80,000
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120,000
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Assume that you have prepared financial statements that show the operating profit for each of the two baskets manufactured by Bob's Baskets. Further assume that under the activity-based costing approach (requirement [ a ], the deluxe baskets are less profitable than when you used only direct labor costs to allocate overhead costs requirement [ c ] in You know that if management sees the activity-based costing results, the company will probably quit producing deluxe baskets. You have friends who work on the production and marketing of deluxe baskets and you believe that they would lose their jobs if management dropped this line.
Required
Should you show the activity-based costing results to management?