Heston Corporation provides accounting services. It uses a job costing system to track each client€™s revenues and costs. The firm is currently working on two jobs. The first job, preparing tax returns for Hinkle Corporation, was bid at $50,000 and had budgeted costs of $36,000. The second job, performing a review of internal controls for Anderson, Inc., was bid at 50 percent above actual costs. The following conversation took place between Isabel (a manager) and Toby (senior staff working for Isabel).

Required:

a. Why is there an incentive to inflate the hours charged to the Anderson job?

b. What should Toby do?

Transcribed Image Text:

Isabel: Toby, I just reviewed timesheets for the two jobs we're working on, and it appears we are quickly approaching the budget of $36,000 for the Hinkle job. Toby: Yes, we're having trouble completing the Hinkle job in the hours budgeted. Isabel: This is the first year on the Hinkle job, and budgeting for first-year clients is always difficult. Toby: I'm sure we can retain this job next year with a little bump in the bid-perhaps to $58,000. Isabel: That's fine for next year, but I have to answer to my boss for this year's results. Why don't we take some of the pressure off by charging some time from the Hinkle job to the internal control project we have with Anderson, Inc.? We're under budget with the Anderson job, and they are paying us based on actual costs plus a 50 percent markup. Toby: Can we do that? Isabel: We don't do it often, but in cases like this, we have to get creative.