Jerry never imagined he’d be sitting there in Washington being grilled mercilessly by a panel of congressmen. But a young government auditor picked up on his scheme last year. His company produced hi-tech navigation devices that were sold to both military and civilian clients. The military contracts were “cost-plus,” meaning that payments were calculated based on actual production costs plus a profit markup. The civilian contracts were bid out in a very competitive market, and every dollar counted. Jerry knew that because all the jobs were done in the same factory, he could manipulate the allocation of overhead costs in a way that would shift costs away from the civilian contracts and into the military “cost-plus” work. That way, the company would collect more from the government and be able to shave its bids down on civilian work. He never thought anyone would discover the alterations he had made in the factory workers’ time sheets, but one of his accountants had noticed and tipped off the government auditor. Now as the congressman from Michigan rakes him over the coals, Jerry is trying to figure out his chances of dodging jail time.

Requirements

1. Based on what you have read above, what was Jerry’s company using as a cost driver to allocate overhead to the various jobs?

2. Name two ways that reducing costs on the civilian contracts would benefit the company.