Ace Fertilizer Company Ethical Cost Allocation and Price Determination

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Ace Fertilizer Company Ethical Cost Allocation and Price Determination

ACE Fertilizer Company

Having a double undergraduate major in Accounting and Integrated Supply Management and an
MBA from a renowned business school qualified Abby Conroy, CMA, for her position at Ace
Fertilizer Company. She has been employed at Ace Fertilizer ……….

All special orders at Ace Fertilizer follow a prescribed billing formula. These special orders,
unless specific authorization is obtained from Tom Brennen himself, must be billed at 80 percent
over the cost of the order……….

What Abby likes especially about Ace Fertilizer is its family atmosphere. In fact, Abby has been
invited several times by George Smilee to his family get -togethers. George is close to his family,
most of whom live within a 10-mile radius. The family has regular get-togethers attended
faithfully by George and his two brothers. George’s family has become very close since the

Direct Costs vs. Indirect Costs
Direct costs are those costs that are easily and conveniently assigned to a special order. Major
direct costs for Abby are direct materials and direct labor. Direct materials are those materials
that become an integral part of the finished product. Direct labor, sometimes referred to as
“touch labor,” includes the cost of those laborers who directly touch the product while it is being

Breeland Ltd. Special Order
The Cost Estimate. Abby has received a request from Breeland Ltd. to produce a unique,
somewhat unstable cleaning solvent for use in …………..

Abby also determines that several other costs and activities will be associated with the
completion of the special order for the solvent. These costs and activities are:

Direct materials, in addition to XO-1600: $20,000.
Direct labor: $30,000.
Unit measure of special order: 4,000 gallons.
Number of batches for production: 4 (due to constraints during the mixing process).

Using ABC at the beginning of the costing period, Abby arrives at the following costs for each of
the five activity measures:

Unit-level activities: $40 per unit of measure.
Batch-level activities: $5,000 per batch.
Product-level activities: $80,000 per project.
Customer-related activities: $30,000 per customer.
Organization-sustaining activities: 100% of direct materials, direct labor, unit-level
activity costs, and batch-level activity costs.

Toward the end of the day on Friday, Abby works up the following cost estimate and price
determination for this special order:……..contemplating what course of action she should take. She plans to rely, in part, on the guidance
provided by the Institute of Management Accounting (IMA) in its Statement of Ethical
Professional Practice, found in Table 1. Abby is wondering why George Smilee is not using this
same guidance. She wonders if George would be taking a similar position if he also were a
Certified Management Accountant (CMA).


Requirement: 1

Did Abby compute the cost of the Breeland Ltd. special order correctly before the weekend get-together? If not, how was her cost estimate and/or price determination flawed?

Requirement: 2

Whose assessment of the costing of this special order do you believe is correct—George Smilee’s or Abby Conroy’s? That is, should George’s conversations with Josh impact Abby’s cost estimate of the Breeland Ltd. special order? Explainyour answer.

Requirement: 3

Are there any ethical issues related to the cost determination on the Breeland Ltd. special order? If so, what issues are present? How should Abby resolve these conflicts? Should Abby go directly to Tom Brennen about this new development? How can Abby use the IMA Statement of Ethical Professional Practice as a guide for her actions?

Requirement: 4


If Abby were to modify her original cost estimate of the Breeland Ltd. special order to include Josh’s purchase of the remaining 10 gallons of XO-1600, what price determination would she have arrived at? What impact would that has had on Ace Fertilizer’s bottom line?

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