Question: Bob and Nancy have recently expanded their educational film business. They did so by producing thirty-second television advertisements for a regional television market in southern Colorado. They began their business fifteen years ago with a contract to film training videos for the US Army. That side of their business continues to provide a steady revenue base, which is currently about 40% of the total revenue.
Nancy is also the firm's accountant. She paid a visit to your accounting class last week. During her visit, she made a presentation detailing her firm's costing activities. Nancy made a particular statement in that presentation: "Since our contract for military training films requires us to detail all costs, we use the process cost method that gives the maximum amount of fixed overhead cost. This almost covers all of our overhead, giving us an edge in competitively pricing our thirty-second TV advertisements, and explains why we have grown so much in this sector of our business."
Considering the statement that Nancy made, respond to the following questions:
• Evaluate whether there is an ethical problem with process costing approach. Support your response with a suitable example.
• Determine whether process costing method represents acceptable accounting procedure.
• Analyze whether Nancy can employ process costing method to assist in making decisions regarding sustainability. Illustrate through relevant research.