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Please read the following ethics case details and respond as detailed below. Case Details: Jennifer Donaldson is new to the Electronics Division of Jurica Corporation. Shortly after taking over her new position as controller, she was asked to develop the Electronics Division's predetermined overhead rate for the upcoming year. The accuracy of the rate is important because it is used throughout the year and any overapplied or underapplied overhead is closed out to Cost of Goods Sold at the end of the year. Jurica Corporation uses direct labor-hours in all of its divisions as the allocation base for manufacturing overhead. To compute the predetermined overhead rate, Jennifer divided her estimate of the total manufacturing overhead for the coming year by the production manager's estimate of the total direct labor-hours for the coming year. She took her computations to the division's general manager for approval but was quite surprised when he suggested a modification in the base. Her conversation with the general manager of the Electronics Division, Justin Bass, went like this: Jennifer: Here are my calculations for next year's predetermined overhead rate. If you approve, we can enter the rate into the computer on January 1 and be up and running in the job-order costing system right away this year. Justin: Thanks for coming up with the calculations so quickly, and they look just fine. There is, however, one slight modification ! would like to see. Your estimate of the total direct labor-hours for the year is 110,000 hours. How about cutting that to about 105,000 hours? Jennifer: I don't know if I can do that. The production manager says she will need about 110,000 direct labor-hours to meet the sales projections for next year. Besides, there are going to be over 108,000 direct labor-hours during the current year and sales are projected to be higher next year. Justin; Jennifer, I know all of that. I would still like to reduce the direct labor-hours in the base to something like 105,000 hours. You probably don't know that I had an agreement with your predecessor as divisional controller to shave around 5% off the estimated direct labor-hours every year. That way, we kept a reserve that usually resulted in a big boost to net operating income at the end of the fiscal year in December. We called it our Christmas bonus. Corporate headquarters always seemed as pleased as punch 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 to change it now. Requirements: 1. Explain how shaving 5% off the estimated direct labor-hours in the base for the predetermined ovqrhead rate usually results in a big boost in net operating income at the end of the fiscal year. Note: This case does not give the estimated overhead, but it may be easier to explain what is going on here if you make up an estimated overhead number and calculate the predetermined overhead rate using the expected labor hours and then recalculate the predetermined overhead rate using the "shaved" labor hours. 2. What are the possible alternatives for Jennifer in this situation? 3. Should Jennifer go along with the general manager's request to reduce the direct labor-hours in the predetermined overhead rate computation to 105,000 direct labor-hours? Why or why not? Case Details: Jennifer Donaldson is new to the Electronics Division of Jurica Corporation. Shortly after taking over her new position as controller, she was asked to develop the Electronics Division's predetermined overhead rate for the upcoming year. The accuracy of the rate is important because it is used throughout the year and any overapplied or underapplied overhead is closed out to Cost of Goods Sold at the end of the year. Jurica Corporation uses direct labor hours in all of its divisions as the allocation base for manufacturing overhead. To compute the predetermined overhead rate, Jennifer divided her estimate of the total manufacturing overhead for the coming year by the production manager's estimate of the total direct labor-hours for the coming year. She took her computations to the division's general manager for approval but was quite surprised when he suggested a modification in the base. Her conversation with the general manager of the Electronics Division, Justin Bass, went like this: Jennifer Here are my calculations for next year's predetermined overhead rate. If you approve, we can enter the rate into the computer on January 1 and be up and running in the job order costing system right away this year. Justin Thanks for coming up with the calculations so quickly, and they look just fine. There is, however, one slight modification I would like to see. Your estimate of the total direct labor hours for the year is 110.000 hours. How about cutting that to about 105,000 hours? Jennifer I don't know if I can do that. The production manager says she will need about 110,000 direct labor-hours to meet the sales projections for next year. Besides, there are going to be over 108.000 direct labor-hours during the current year and sales are projected to be higher next year. Justin Jennifer, I know all of that I would still like to reduce the direct labor-hours in the base to something like 105.000 hours. You probably don't know that I had an agreement with your predecessor as divisional controller to shave around 5% off the estimated direct labor hours every year. That way, we kept a reserve that usually resulted in a big boost to net operating income at the end of the hiscal year in December. We called it our Christmas bonus Corporate headquarters always seemed as pleased as punch 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 to change it now. Requirements: 1. Explain how shaving 5% off the estimated direct labor-hours in the base for the predetermined overhead rate usually results in a big boost in net operating income at the end of the fiscal year Note: This case does not give the estimated overhead, but it may be easier to explain what is going on here if you make up an estimated overhead number and calculate the predetermined overhead rate using the expected labor hours and then recalculate the predetermined overhead rate using the "shaved labor hours

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