Ace Fertilizer Company
Abby Conroy was tasked with calculating an effective quote for Breeland Ltd., she chose the activity based accounting costing system since it more accurately captures the related costs. A special order was placed by Breeland Ltd. with Ace Fertilizer Company. The did not plan to order more of this product in the future. Based on Ace’s policy, the special order included disposal costs for any used materials in the event no other orders existed for the unused materials at the time the Breeland contract was signed. Abby correctly calculated the total direct material and labor costs and accurately arrived at the indirect costs using the ABC method and used cost activity pools that make sense for the company and product. She incorrectly included the organization-sustaining costs which are not related to any specific product so should not be included. Abby incorrectly calculated the mark up cost by dividing 80% from the cost rather than multiplying so the markup and the total cost to Breeland has been overstated by $193,500. This would ultimately produce a higher profit with lower costs and a higher customer margin but would be inconsistent with Ace 80% markup policy. Revisions could be made and an accurate quote could be provided to Tom Brennen for approval. During personal time over the weekend, George was presented with a possible opportunity to sell the unused portion of Breelands special order materials to his brother Josh. On Monday, George wanted to leave the Breeland quote as is, whereas Abby wanted to revise it to exclude the sale of materials to Josh plus additional charges. George is correct to leave the quote unchanged, since there are no new orders for the additional XO-1600 yet even though he and Josh discussed it during personal time. Company policy dictates that the special order customer would be billed for unused materials in the absence of another existing order for the same materials. It would be putting the cart before the horse to recalculate new costs and inform Breeland of a possible price revision before Josh confirms, especially since the information exchange occurred over the weekend during a personal family event. It is likely that Josh will purchase the additional 10 gallons of product but that can’t be confirmed until later in the week. It is not correct however that Breeland should incur those material costs if Josh does purchase them. George is not correct in how he would handle the transaction with Breeland should Josh purchase the materials. The materials should not be double billed and disposal fees should not be incurred by Breeland if this event never occurs. From an IME standpoint, Abby’s costing calculations were flawed which speaks to her competency as a management accountant, but her integrity was consistent with IMA ethical standards. Her markup mistake was most likely a clerical one only that could easily be fixed however including organization-sustaining costs in the client quote is a larger concept level mistake. The first error places a small black mark against her level of competence. Since she has developed an excellent level of expertise with Ace, I would suggest that it could be overlooked. The second error however is larger and would suggest her level of competence might be questioned. Following Georges’ conversation with Josh, Abby was keen on modifying the bid to include a materials reduction of $16,000, elimination of the $10,000 disposal fee for unused materials and a reduction in organization sustaining overhead costs of $52,000. Including the 80% markup, this would save Breeland $93,600 if Abby’s original quote had been correct and the numbers were not modified to remove the organization-sustaining error. It is clear that reworking the original quote to accommodate a new client would benefit Breeland, however the conversation between George and Josh was personal and not final, even though Josh was able to...
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