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THE MCDONNELL COMPANY The McDonnell Company has a commercial and defense contracting business A contracting officer for the United States Air Force has insisted that underapplied overhead should no longer be entirely written off directly as an adjustment to Cost of Defense Goods Sold for a given year. His insistence arose because $50 million of underapplied overhead was added to the $400 million of unadjusted Cost of Goods Sold in 2013. There were no beginning inventories Factory overhead is applied as a percentage of direct labor dollars as contracts are produced. The Air Force had a large cost-plus-fixed-fee contract representing $300 million of the $400 million of defense production started and sold during 2013. It had no other contracts pending with McDonnell. An analysis of costs showed (in millions): Contracts (Work) in Progress Finished Goods Inventory Cost of Goods Sold $25 $250 50 Direct Material Used Direct Labor Cost Factory Overhead Applied Total Before Adjustment Add: Underapplied Overhead Total After Adjustment $425 45 90 560 100 400 50 $450 0 $560 $40 * NOTE, the $400 million Total Before Adjustment in Cost of Goods Sold includes $300 million attributable to one Air Force contract. REQUIRED: 1) Provide the journal entry that McDonnell used to prorate the underapplied overhead, How much of this amount is charged to the Air Force? 2) As the representative for the Air Force disputing McDonnell's disposition of underapplied overhead, describe how you would prefer to see underapplied overhead treated in this instance. Provide the journal entry to dispose of the underapplied overhead according to the method you have chosen. How much of this amount is charged to the Air Force? 3) What overhead rate based on Direct Labor Dollars would have resulted in Factory Overhead Applied equaling Factory Overhead Incurred? Provide the journal entry to dispose of the underapplied overhead according to this rate. 1) How might McDonnell Company's current method affect their commercial business which operates in a competitive market

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