Chapter 4, Problem 4.45P

(25–30 min.) 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:

Direct materials control, 1/1/2017	25,000
Direct materials purchased, 2017	650,000
Direct materials added to production, 2017	630,000
Work in process control, 1/1/2017	280,000
Direct manufacturing labor, 2017	880,000
Cost of goods manufactured, 2017	2,900,000
Finished goods control, 1/1/2017	320,000
Finished goods control, 12/31/2017	290,000
Manufacturing overhead costs, 2017	1,300,000

Anderson’s revenue for 2017 was $5,550,000, and the company’s selling and administrative expenses were $2,720,000.

1. 1. Insert the given information in the T-accounts below. Calculate the following amounts to complete the T-accounts:

  Required

1. a. Direct materials control, 12/31/2017
2. b. Manufacturing overhead allocated, 2017
3. c. Cost of goods sold, 2017

1. 2. Calculate the amount of under- or overallocated manufacturing overhead.
2. 3. Calculate Anderson’s net operating income under the following:
3. a. Under- or overallocated manufacturing overhead is written off to cost of goods sold.
4. b. Under- or overallocated manufacturing overhead is prorated based on the ending balances in work in process, finished goods, and cost of goods sold.
5. 4. Underwood chooses option 3a 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.