Fraud Case 19-1

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Fraud Case 19-1
A cost driver is a primary activity to the occurrence of a cost. It is thus the primary influence on the charges being expensed to an operation (Horngren, Datar and Madhav 2015). Jerry was well aware that since the civilian and military gadgets were made at the same company, he would interchange the activities that distinguish the military orders with the civilian orders as the military orders were “cost-plus” mark up. By so doing, the overhead costs would shift from the civilian orders to the military and thereby leave enormous profits for the firm. To achieve this, Jerry had to use the direct labor hours as the cost driver as he made several alterations in the workers time sheets.
Jerry’s actions are not only fraudulent but also unethical. Honesty in dealing contracts should be observed to ensure the integrity and that all parties get value for their money (Horngren, Datar and Madhav 2015). The overheads from the military should be entirely distinguished from the civilian overheads to eradicate such mix-ups. Jerry decided to unethically combine the two different activities with the sole purpose of burdening the military and thereby benefiting by gaining more profits.
Reducing costs on the civilian contracts would benefit the company in two main ways: 1. shifting the overhead production costs to the military and charging them against the government reduces two cost drivers in the direct material costs and the direct labor costs on the civilian contracts.

Reduced costs of production mean that the firm can produce more products with a given capital. 2. Charging the labor costs to the military contract reduces the costs of production, and the market being competitive, the firm will sell the products at competitive prices realizing huge profits (Horngren, Datar and Madhav 2015). Increased production levels and increased earnings for the company are enough factors which would motivate Jerry to commit fraud.
Work citedHorngren, Charles, Datar, Srikant and Rajan, Madhav. Cost accounting: A managerial emphasis. London: Pearson, 2015.