Week #2 (Case 34pg 139-140 inside the ref)
Complete Group Case 3-33 on page 138. Make sure to answer the questions completely and show all computations with proper labeling if required. Explain how shaving 5% off the estimated direct labor-hours in the base for the predetermined overhead rate usually results in a big boost in net operating income at the end of the fiscal year. Should Terri Ronsin go along with the general manager’s request to reduce the direct labor-hours in the predetermined overhead rate computation to 420,000 direct labor-hours? Shaving 5% off the estimated direct labor-hours in the predetermined overhead rate will result in an artificially high overhead rate. The artificially high predetermined overhead rate is likely to result in over applied overhead for the year. The cumulative effect of over applying the overhead throughout the year is all recognized in December when the balance in the Manufacturing Overhead account is closed out to Cost of Goods Sold. If the balance were closed out every month or every quarter, this effect would be dissipated over the course of the year. This question may generate lively debate. Where should Terri Ronsin’s loyalties lie? Is she working for the general manager of the division or for the corporate controller? Is there anything wrong with the “Christmas bonus”? How far should Terri go in bucking her boss on a new job? While individuals can certainly disagree about what Terri should do, some of the facts are indisputable. First, the practice of understating direct labor-ours results in artificially inflating the overhead rate. This has the effect of inflating the cost of goods sold figures in all months prior to December and overstating the costs of inventories. In December, the huge adjustment for over applied overhead provides a big boost to net operating income. Therefore, the practice results in distortions in the pattern of net operating income over the year. In addition, since all of the adjustment is taken to Cost of Goods Sold, inventories are still overstated at year-end. This means, of course, that the net operating income for the entire year is also overstated. While Terri is in an extremely difficult position, her responsibilities under the IMA’s Standards of Ethical Conduct for Management Accountants seem to be clear. The Objectivity Standard states that “management accountants have a responsibility to disclose fully all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, comments, and recommendations presented.” In our opinion, Terri should discuss this situation with her immediate supervisor in the controller’s office at corporate headquarters. This step may bring her into direct conflict with the general manager of the division, so it would be a very difficult decision for her to make. In the actual situation that this case is based on, the corporate controller’s staff were aware of the general manager’s accounting tricks, but top management of the company supported the general manager because “he comes through with the results” and could be relied on to hit the annual profit targets for his division. Personally, we would be very uncomfortable supporting a manager who will resort to deliberate distortions to achieve “results.” If the manager will pull tricks in this area, what else might he be doing that is questionable or even perhaps illegal? Week #3(Case 6-35 pg 333-341)
Complete Group Case 6-32 on page 276. Make sure to answer the questions completely and show all computations with proper labeling if required. Examination I- Covers chapters 1, 2, 3 and 5. 90 minute limit. What is the company’s over-all break-even point in total sales dollars? Of the total fixed costs of $400,000, $20,000 could be avoided if the Velcro product were dropped. $80,000 if the Metal product were dropped and $60,000 if the Nylon product...
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