Question

4.1 (2.5 Marks): Milion Dollar Mills is a textile manufacturing firm located in the southern United States. The company carefully prepares all financial statements in accordance with GAAP, and gives a copy of all financial statements to each department. In addition, the company keeps records on quality control, safety, and environmental pollution by the company. It then prepares "scorecards" for each department indicating their performance. Recently, the financial impact of the second set of information was added, and the information has been used in the evaluation of employees for merit pay and promotions. At the most recent employee meeting, Tyler Hanes, marketing manager, expressed his discomfort with the system. He said there was no guarantee that the second set of information was fair, since there were no generally accepted principles for this kind of information, He also said that it was kind of like keeping two sets of books-one following all legal requirements, and the other one actually used by the company. Required: 1. Is it ethical to evaluate managers in the way described? Explain briefly. Q.2 (3.5 Marks): ABC Manufacturing Company has the following data: Direct labor Direct materials used Total manufacturing overhead Beginning work in process $145,000 151,000 208,000 26,000 Instructions Compute (a) total manufacturing costs and (b) total cost of work in process. 2 of 3 ABU

Answer 1

1. No, it is not ethical to evaluate managers in the way described. Because GAAP are applied on the financial information of the company which is used to prepare the financial statement of the company. GAAP does not provide any guidance on reporting of non-financial information. Therefore management has the freedom to evaluate its non-financial information and based on that take the decision or evaluates the performances. The argument that it is like maintaining two sets of books is incorrect.

   

2. Total Manufacturing Cost                                Amount( in $)

Opening Work in Process                                   26000

Direct Labor 145000

Direct Material                                                    151000

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Prime Cost 322000

Add: Manufacturing Overhead                            208000

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Total Manufacturing Cost                                 530000

Note: Since the percentage completion are not given in the question the part (b)total cost of work in process cannot be calculated and will be consider same as Total Manufacturing Cost.

3. Total cost of Job A45                                         Amount( in $)

Direct Material cost (4 Boxes @ $ 30)                     120

Direct Labor Cost (20 Hours @ $ 15)                       300

Allocated Overhead (20 Hours @ $ 9)                     180

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Total Cost 600