Reference no: EM132781375
Robert Archer joined Coleman Enterprises as controller in October 2016. Coleman 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 120?% 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.
Archer is eager to impress his new? employer, and he knows that in 2017?, Coleman?'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?, Archer decides to adjust the manufacturing overhead rate to 150?% 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 27,000
Direct materials purchased, 2017 680,000
Direct materials added to production, 2017 580,000
Work in process control, 1/1/2017 260,000
Direct manufacturing labor, 2017 958,000
Cost of goods manufactured, 2017 2,900,330
Finished goods control, 1/1/2017 180,000
Finished goods control, 12/31/2017 235,635
Manufacturing overhead costs, 2017 1,350,000
Coleman?'s revenue for 2017 was $5,733,000?, and the? company's selling and administrative expenses were $2,966,000.
Problem 1. Insert the given information in the? T-accounts provided. 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
Problem 2. Calculate the amount of? under- or overallocated manufacturing overhead.
Problem 3. Calculate Coleman?'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.
Problem 4. Archer 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.