Bob and Nancy Barnett Have Recently Expanded Their Television-Based Educational

question 24

Essay

Bob and Nancy Barnett have recently expanded their television-based educational film business by shooting 30-second television ads for a regional television market in southern Colorado. They began business about 15 years ago with a contract to film training videos for the U.S. Army, and that business continues to provide a steady revenue base, currently about 40 percent of total revenue. Nancy Barnett is the firm's accountant, and in a visit to your accounting class last week, made a presentation detailing her firm's costing activities. Your instructor has asked you to respond to one particular statement that Nancy Barnett made: "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 30-second TV ads, and explains why we have grown so much in this sector of our business." Nancy knows that the U.S. Army uses cost-plus contracts on services like the Barnetts provide.
Required:
Is there an ethical problem with this approach? Does it represent acceptable accounting procedure?

---

Definitions:

Tacit Understanding

An implicit agreement or understanding that is not formally expressed or written, but is assumed to be shared among the parties involved.

Informal Collusion

A scenario where businesses unofficially agree to certain practices, such as price-setting or market-sharing, without formal agreement, often to reduce competition.

Cartel

A cartel refers to an association of independent businesses or countries that collaborate to manipulate prices and limit competition for certain goods or services.

Cartel

An agreement between competing firms to control prices or exclude entry of a new competitor in a market, usually to increase market power and profits.