CASE 3â18 Ethics and the Manager [Course ObjectiveB] Terri Ronsin had recently been transferred to the HomeSecurity Systems Division of National Home Products. Shortly aftertaking over her new position as divisional controller, she wasasked to develop the divisionâs predetermined overhead rate for theupcoming year. The accuracy of the rate is important because it isused throughout the year and any overapplied or underapplied over-head is closed out to Cost of Goods Sold at the end of the year.National Home Products uses direct labor-hours in all of itsdivisions as the allocation base for manufacturing overhead.
To compute the predetermined overhead rate, Terri divided herestimate of the total manufacturing overhead for the coming year bythe production managerâs estimate of the total direct labor-hoursfor the coming year. She took her computations to the divisionâsgeneral manager for approval but was quite surprised when hesuggested a modification in the base. Her conversation with thegeneral manager of the Home Security Systems Division, HarryIrving, went like this:
Ronsin: Here are my calculations for next yearâs predeterminedoverhead rate. If you approve, we can enter the rate into thecomputer on January 1 and be up and running in the job-ordercosting system right away this year.
Irving: Thanks for coming up with thecalculations so quickly, and they look just fine. There is, how-ever, one slight modification I would like to see. Your estimate ofthe total direct labor-hours for the year is 440,000 hours. Howabout cutting that to about 420,000 hours?
Ronsin: I donât know if I can do that. The production managersays she will need about 440,000 direct labor-hours to meet thesales projections for the year. Besides, there are going to be over430,000 direct labor-hours during the current year and sales areprojected to be higher next year.
Irving: Teri, I know all of that. I would still like to reducethe direct labor-hours in the base to some- thing like 420,000hours. You probably donât know that I had an agreement with yourpredecessor as divisional controller to shave 5% or so off theestimated direct labor-hours every year. That way, we kept areserve that usually resulted in a big boost to net operatingincome at the end of the fiscal year in December. We called it ourChristmas bonus. Corporate headquarters always seemed as pleased aspunch that we could pull off such a miracle at the end of the year.This system has worked well for many years, and I donât want tochange it now.
Required:
Assume the following information:
Direct Materials
$40
per unit
Direct Labor
$20
per unit
Total Estimated Manufacturing Overhead
$8,400,000
Manufacturing overhead is allocated based on estimateddirect-labor hours.
Each unit of product requires 1 direct labor hour.
During the year, the company produced and sold 442,000 units,and incurred actual overhead of $8,450,000, what is theunder/overapplied overhead if:
The estimated Direct Labor Hours is 440,000.
The estimated Direct Labor Hours is 420,000.
All over-applied and under-applied overhead applied directly tocost of goods sold. Assume that the company had $900,000 in netoperating income before the over/under applied overhead adjustmentis made. What is the revised net income after the over/underappliedoverhead adjustment?
CASE 3â18 Ethics and the Manager [Course ObjectiveB] Terri Ronsin had recently been transferred to the HomeSecurity Systems Division of National Home Products. Shortly aftertaking over her new position as divisional controller, she wasasked to develop the divisionâs predetermined overhead rate for theupcoming year. The accuracy of the rate is important because it isused throughout the year and any overapplied or underapplied over-head is closed out to Cost of Goods Sold at the end of the year.National Home Products uses direct labor-hours in all of itsdivisions as the allocation base for manufacturing overhead.
To compute the predetermined overhead rate, Terri divided herestimate of the total manufacturing overhead for the coming year bythe production managerâs estimate of the total direct labor-hoursfor the coming year. She took her computations to the divisionâsgeneral manager for approval but was quite surprised when hesuggested a modification in the base. Her conversation with thegeneral manager of the Home Security Systems Division, HarryIrving, went like this:
Ronsin: Here are my calculations for next yearâs predeterminedoverhead rate. If you approve, we can enter the rate into thecomputer on January 1 and be up and running in the job-ordercosting system right away this year.
Irving: Thanks for coming up with thecalculations so quickly, and they look just fine. There is, how-ever, one slight modification I would like to see. Your estimate ofthe total direct labor-hours for the year is 440,000 hours. Howabout cutting that to about 420,000 hours?
Ronsin: I donât know if I can do that. The production managersays she will need about 440,000 direct labor-hours to meet thesales projections for the year. Besides, there are going to be over430,000 direct labor-hours during the current year and sales areprojected to be higher next year.
Irving: Teri, I know all of that. I would still like to reducethe direct labor-hours in the base to some- thing like 420,000hours. You probably donât know that I had an agreement with yourpredecessor as divisional controller to shave 5% or so off theestimated direct labor-hours every year. That way, we kept areserve that usually resulted in a big boost to net operatingincome at the end of the fiscal year in December. We called it ourChristmas bonus. Corporate headquarters always seemed as pleased aspunch that we could pull off such a miracle at the end of the year.This system has worked well for many years, and I donât want tochange it now.
Required:
Assume the following information:
Direct Materials | $40 | per unit |
Direct Labor | $20 | per unit |
Total Estimated Manufacturing Overhead | $8,400,000 | |
| Manufacturing overhead is allocated based on estimateddirect-labor hours. Each unit of product requires 1 direct labor hour. |
During the year, the company produced and sold 442,000 units,and incurred actual overhead of $8,450,000, what is theunder/overapplied overhead if:
The estimated Direct Labor Hours is 440,000.
The estimated Direct Labor Hours is 420,000.
All over-applied and under-applied overhead applied directly tocost of goods sold. Assume that the company had $900,000 in netoperating income before the over/under applied overhead adjustmentis made. What is the revised net income after the over/underappliedoverhead adjustment?
