Group Case Assignment
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Group Assignments
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
Group Assignments
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
References: The McGraw-Hill Companies, Inc., 2006. All rights reserved. Pg 139-140. Managerial Accounting, 11th Edition (FYI) Garrison, R. H., & Noreen, P. (2006). Manual Managerial Accounting, 11th ed., 139-140. Retrieved from http://www.scribd.com/doc/24464355/Manual-Managerial-Accounting-11th-Edition-by-Garrison-Noreen (Manual Managerial Accounting (11th Edition) by Garrison & Noreen) http://www.scribd.com/(the world’s largest social reading and publishing company) http://arts.uwaterloo.ca/~a2webb/9-24_28.pdf