CASE 3–18 Ethics and the Manager [Course ObjectiveB] Terri Ronsin had recently been transferred...

Free

60.1K

Verified Solution

Question

Accounting

CASE 3–18 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 division’s 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 manager’s estimate of the total direct labor-hoursfor the coming year. She took her computations to the division’sgeneral 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 year’s 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 the calculationsso quickly, and they look just fine. There is, how- ever, oneslight modification I would like to see. Your estimate of the totaldirect labor-hours for the year is 440,000 hours. How about cuttingthat to about 420,000 hours?
Ronsin: I don’t 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 don’t 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 don’t 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.
QUESTION: Calculate the cost of one unit of product,assuming that the overhead per unit is based on her supervisorspreferred estimate of 420,000 hours. (Round all dollar figures totwo decimal places.)
If 442,000 units were produced, how much overhead wasapplied to work in process?

Answer & Explanation Solved by verified expert

4.4 Ratings (641 Votes)

All working forms part of the answer
Requirement 1: Predetermined manufacturing overhead rate per unit

A	Total Estimated Manufacturing Overhead	$ 8,400,000.00
B	Estimated no. of hours	420,000
C = A/B	Manufacturing Overhead per hour	$ 20.00

Requirement 2

A	No. of units produced	442,000
B	Hours per unit required	1
C = A x B	No. of hours	442,000
D	Manufacturing Overhead per hour	$ 20.00
E = C x D	Amount of overhead applied to Work in Process	$ 8,840,000.00

Overhead applied = $ 8,840,000

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

In: AccountingCASE 3–18 Ethics and the Manager [Course ObjectiveB] Terri Ronsin had recently been transferred to...CASE 3–18 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 division’s 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 manager’s estimate of the total direct labor-hoursfor the coming year. She took her computations to the division’sgeneral 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 year’s 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 the calculationsso quickly, and they look just fine. There is, how- ever, oneslight modification I would like to see. Your estimate of the totaldirect labor-hours for the year is 440,000 hours. How about cuttingthat to about 420,000 hours?Ronsin: I don’t 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 don’t 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 don’t want tochange it now.Required:Assume the following information:Direct Materials$40per unitDirect Labor$20per unitTotal Estimated Manufacturing Overhead$8,400,000Manufacturing overhead is allocated based on estimateddirect-labor hours.Each unit of product requires 1 direct labor hour.QUESTION: Calculate the cost of one unit of product,assuming that the overhead per unit is based on her supervisorspreferred estimate of 420,000 hours. (Round all dollar figures totwo decimal places.)If 442,000 units were produced, how much overhead wasapplied to work in process?

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. QUESTION: Calculate the cost of one unit of product,assuming that the overhead per unit is based on her supervisorspreferred estimate of 420,000 hours. (Round all dollar figures totwo decimal places.) If 442,000 units were produced, how much overhead wasapplied to work in process?