ACCT 505 week 1 CASE3-30
CASE 3-30 Ethics and the Manager
[LO1, LO2, LO7]
Go to page 130, Case 3-30, Ethics
and the Manager. Let’s discuss the questions, make value-added comments,
points, and share personal experiences of unethical situations.
Cristin Madsen has recently been
transferred to the Appliances Division of Solequin Corporation. Shortly after
taking over her new position as divisional controller, she was asked to develop
the division's predetermined overhead rate for the upcoming year. The accuracy
of the rate is important because it is used throughout the year and any
overapplied or underapplied overhead is closed out to Cost of Goods Sold at the
end of the year. Solequin Corporation uses direct labor-hours in all of its
divisions as the allocation base for manufacturing overhead.
To compute the predetermined
overhead rate, Cristin divided her estimate of the total manufacturing overhead
for the coming year by the production manager's estimate of the total direct
labor-hours for the coming year. She took her computations to the division's
general manager for approval but was quite surprised when he suggested a
modification in the base. Her conversation with the general manager of the
Appliances Division, Lance Jusic, went like this:
Madsen: Here are my calculations
for next year's predetermined overhead rate. If you approve, we can enter the
rate into the computer on January 1 and be up and running in the job-order
costing system right away this year.
Jusic: Thanks for coming up with
the calculations so quickly, and they look just fine. There is, however, one
slight modification I would like to see. Your estimate of the total direct
labor-hours for the year is 110,000 hours. How about cutting that to about
105,000 hours?
Madsen: I don't know if I can do
that. The production manager says she will need about 110,000 direct
labor-hours to meet the sales projections for next year. Besides, there are
going to be over 108,000 direct labor-hours during the current year and sales
are projected to be higher next year.
Jusic: Cristin, I know all of
that. I would still like to reduce the direct labor-hours in the base to
something like 105,000 hours. You probably don't know that I had an agreement
with your predecessor as divisional controller to shave 5% or so off the
estimated direct labor-hours every year. That way, we kept a reserve that
usually resulted in a big boost to net operating income at the end of the
fiscal year in December. We called it our Christmas bonus. Corporate
headquarters always seemed as pleased as punch that we could pull off such a
miracle at the end of the year. This system has worked well for many years, and
I don't want to change it now.Required:
2. Should Cristin Madsen go along
with the general manager's request to reduce the direct labor-hours in the
predetermined overhead rate computation to 105,000 direct labor-hours?
TUTORIAL
PREVIEW
1. Shaving off 5% of the estimated direct labor hours will result
in an increase in the predetermined overhead rate. The result of this will be
increase in the overheads
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