91Ó°ÊÓ

Job costing, ethics. Joseph Underwood joined Anderson Enterprises as controller in October \(2016 .\) Anderson Enterprises manufactures and installs home greenhouses. The company uses a normal-costing system with two direct- cost pools, direct materials and direct manufacturing labor, and one indirect- cost pool, manufacturing overhead. In 2016 , manufacturing overhead was allocated to jobs at \(150 \%\) of direct manufacturing labor cost. At the end of \(2016,\) an immaterial amount of underallocated overhead was closed out to cost of goods sold, and the company showed a small loss. Underwood is eager to impress his new 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 firm sometime in 2018 . At the end of 2016 , Underwood decides to adjust the manufacturing overhead rate to \(160 \%\) of direct labor cost. He explains to the company president that, because overhead was underallocated in 2016 , this adjustment is necessary. cost information for 2017 follows: Anderson's revenue for 2017 was \(\$ 5,550,000,\) and the company's selling and administrative expenses were \(\$ 2,720,000\) 1\. Insert the given information in the T-accounts below. Calculate the following amounts to complete the T-accounts: a. Direct materials control, 12/31/2017 b. Manufacturing overhead allocated, 2017 c. cost of goods sold, 2017 2\. Calculate the amount of under-or overallocated manufacturing overhead. 3\. Calculate Anderson's net operating income under the following: a. Under- or overallocated manufacturing overhead is written off to cost of goods sold. b. Under- or overallocated manufacturing overhead is prorated based on the ending balances in work in process, finished goods, and cost of goods sold. 4\. Underwood chooses option 3 a above, stating that the amount is immaterial. Comment on the ethical implications of his choice. Do you think that there were any ethical issues when he established the manufacturing overhead rate for 2017 back in late \(2016 ?\) Refer to the IMA Statement of Ethical Professional Practice.

Step by step solution

01

1. Insert the given information in the T-accounts

To complete the T-accounts, we'll calculate the following amounts: a. Direct materials control (12/31/2017) b. Manufacturing overhead allocated (2017) c. Cost of goods sold (2017) Unfortunately, we cannot create T-accounts here. However, based on the given information, we can calculate the required amounts.

02

a. Direct materials control (12/31/2017)

Direct materials control = Beginning balance + Purchases - Direct materials used Assuming there's a given amount of Direct materials used, we can calculate the ending balance.

03

b. Manufacturing overhead allocated (2017)

Manufacturing overhead allocated = Direct manufacturing labor cost * 160% We will need the value of direct manufacturing labor cost to calculate the manufacturing overhead allocated.

04

c. Cost of goods sold (2017)

Cost of goods sold = Direct materials used + Direct manufacturing labor cost + Manufacturing overhead allocated - Under/Overallocated overhead Once we have all the required information, we can calculate the cost of goods sold for 2017.

05

2. Calculate the amount of under-/overallocated manufacturing overhead

Under-/overallocated manufacturing overhead = Actual manufacturing overhead - Manufacturing overhead allocated We will need the value of actual manufacturing overhead for 2017 to calculate the under-/overallocated manufacturing overhead.

06

3. Calculate Anderson's net operating income under the following:

a. Under- or overallocated manufacturing overhead is written off to the cost of goods sold. b. Under- or overallocated manufacturing overhead is prorated based on the ending balances in work in process, finished goods, and cost of goods sold.

07

a. Under-/overallocated manufacturing overhead written off to COGS

Net operating income = Revenue - COGS (adjusted for under-/overallocated overhead) - Selling expenses - Administrative expenses Calculate the net operating income after writing off under-/overallocated manufacturing overhead to the cost of goods sold.

08

b. Under-/overallocated manufacturing overhead prorated based on balances

Prorate the under-/overallocated manufacturing overhead based on the ending balances in work in process, finished goods, and cost of goods sold, and then calculate the net operating income accordingly.

09

4. Comment on the ethical implications of Underwood's choice

Underwood's choice to write off the under-/overallocated manufacturing overhead to the cost of goods sold, citing immateriality, has ethical implications. His eagerness to impress his employer and achieve profitability may have led to potential unethical decisions regarding the manufacturing overhead rate. To discuss the ethical issues, we can refer to the IMA Statement of Ethical Professional Practice, which emphasizes integrity, objectivity, competence, confidentiality, and professional behavior. Underwood's decision-making should be examined to ensure it adheres to these principles, and any potential conflicts should be addressed.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Cost Accounting

Cost accounting is a financial management tool that helps businesses determine the costs associated with producing a product or providing a service. It entails collecting, recording, analyzing, summarizing, and evaluating various alternative courses of action. Its goal is to advise management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides detailed cost information that management needs to control current operations and plan for the future.

For instance, cost accounting will help a company like Anderson Enterprises keep track of their direct materials, direct labor costs, and manufacturing overhead to ensure accurate job costing. This is essential for pricing strategies, identifying areas for improvement, and ensuring the company's competitiveness in the market. Adjusting manufacturing overhead allocation rates, as done by Joseph Underwood, is a part of this process but has to be conducted with transparency and adherence to ethical standards to maintain the integrity of financial reports.

Manufacturing Overhead Allocation

Manufacturing overhead allocation involves assigning a company's indirect costs to its products or job orders. These overhead costs are not directly traceable to specific units of product but are necessary for the production process. Examples include utilities, depreciation, and salaries for management. Typically, overhead is allocated based on a predetermined rate, like the 160% of direct labor cost that Underwood set for Anderson Enterprises.

In the exercise, students are tasked to adjust manufacturing overhead to ensure that jobs are costed appropriately. Accurate overhead allocation is critical for product pricing and profitability assessments. Over-or under-allocation can lead to misstated financial performance, as was the potential risk mentioned in the scenario with Underwood's adjustment. The process often involves estimation, which requires a responsible approach to avoid deliberate misallocation, as such practices could distort financial results and mislead stakeholders.

IMA Statement of Ethical Professional Practice

The IMA Statement of Ethical Professional Practice serves as a code of conduct for management accountants. It outlines four key principles: honesty, fairness, objectivity, and responsibility. Adhering to these standards is not just a matter of professional discipline; it's essential for maintaining public trust in the financial reporting processes.

When considering the scenario in the exercise, Underwood's decision to increase the manufacturing overhead rate could potentially conflict with the IMA's guidelines, especially if his actions were driven by a desire to influence financial results inappropriately rather than reflecting a genuine estimation of overhead costs. Ethical issues that may arise from such a situation include misrepresenting the company's financial performance and compromising the integrity and objectivity expected of accountants. Ethical practice dictates that all potential conflicts of interest should be avoided, and the financial information must be presented fairly and accurately to support sound business decision-making.