Question

VUESTRID Joseph Underwood joined Anderson Enterprises as controller in October 2016 A Cick the icon for additional information about Anderson Enterprises) Underwood is eager to impress his wow employer, and he knows that in 2017, Anderson's upper management is under pressure to show a profit in a challenging competitive environment because they are hoping to be acquired by a large private equity for some time in 2018 Authe end of 2016, Underwood decides to adjust the manufacturing overhead rate to 180% of direct labor cost He explains to the company president that because Overhead was unde allocated in 2016, this adjustment is necessary Cost information for 2017 follows the contew the cost information for 2017) Anderson's revenue for 2017 was 55,550,000, and the company's selling and administrative expenses were $2,720.000 Read the requirements Requirement 1. Insert the given formation in the accounts below. Calculate the followig amounts to complete the accounts (a) Direct materials control 12/31/2017, b) Manufacturing overhead allocated, 2017, and (c) Cost of goods sold 2017 (Abbreviations used: COGM = cost of goods manufactured, COGS cost of goods sold, Dir=drect, Dit is direct materials, MO manufacturing overhead, and OH = overhead) Direct Work-in-process Control Materials Control Finished Goods

Answer 1

Part 1)

The T-Accounts are prepared as below:

Direct Materials Control
1/1/2017	25,000		630,000
	650,000
Bal.	$45,000

_____

Work-in Process Control
1/1/2017	280,000		2,900,000
Direct Manufacturing Labor	880,000
Direct Materials	630,000
Overhead Allocated (880,000*160%)	1,408,000
Bal.	$298,000

_____

Finished Goods Control
1/1/2017	320,000		2,930,000
	2,900,000
Bal.	$290,000

_____

Manufacturing OH Control
	1,300,000
Bal.	$1,300,000

_____

Manufacturing OH Allocated
			1,408,000
		Bal.	$1,408,000

_____

Cost of Goods Sold
	2,930,000
Bal.	$2,930,000

_____

The values of different accounts as on 31/12/2017 are given as below:

1a) Direct Materials Control, 12/31/2017 = $45,000

1b) Manufacturing Overhead Allocated, 2017 = $1,408,000

1c) Cost of Goods Sold, 2017 = $2,930,000

_____

Part 2)

The amount of under-or overallocated manufacturing overhead is calculated as below:

Overhead Overallocated = Manufacturing Overhead Allocated - Manufacturing Overhead Control = 1,408,000 - 1,300,000 = $108,000

_____

Part 3)

The amount of net income under each scenario is arrived as below:

a)

Revenue	5,550,000
Less Cost of Goods Sold (2,930,000 - 108,000)	2,822,000
Selling and Administrative Expenses	2,720,000
Net Operating Income	$8,000

____

b)

Step 1: Allocate Overhead on the Basis of Ending Balances

The overhead is allocated as follows:

	Ending Balance	Weight	Allocated Manufacturing Overhead
WIP Control	298,000	8.5% (298,000/3,518,000)	9,180 (108,000*8.5%)
Finished Goods Control	290,000	8.2% (290,000/3,518,000)	8,856 (108,000*8.2%)
Cost of Goods Sold	2,930,000	83.3% (2,930,000/3,518,000)	89,964 (108,000*83.3%)
Total	$3,518,000		$108,000

____

Step 2: Calculate Net Operating Income

The net operating is determined as follows:

Revenue	5,550,000
Less Cost of Goods Sold (2,930,000 - 89,964)	2,840,036
Selling and Administrative Expenses	2,720,000
Net Operating Income	-$10,036

_____

Part 4)

It is clearly provided in the question that the company's management is under pressure to show a profit in order to report a favorable financial position (because of potential acquisition by another company in 2018) . In the given scenario, it is not ethical for Underwood to increase the overhead allocation rate to 160% as he may had an intention to reduce the value of cost of goods sold which in turn would result in an increase in net operating income for the year 2017. While the amount of difference of $18,036 (108,000 - 89,964) between the cost of goods sold under scenario 3-a) and 3-b) may not appear to be material, the increased value of cost of goods sold under scenario 3-b) resulted in a loss. Therefore, this minor difference of $18,036 cause a significant impact on company's net operating income and cannot be treated as immaterial.