Chat with AI
Cost Management 6th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins
Edition 6ISBN: 978-0078025532Cost Management 6th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins
Edition 6ISBN: 978-0078025532 Exercise 52
Ethics and Overhead Variance New Millennium Technologies uses a standard cost system and budgeted 50,000 machine-hours to manufacture 100,000 units in 2013. The budgeted total fixed factory overhead was $9,000,000. The company manufactured and sold 80,000 units in 2013 and would report a loss of $9,600,000 after charging the production volume variance to cost of goods sold (CGS) of the period.
Bob Evans, VP-Finance, believes that the denominator activity level of 50,000 machine hours is too low. The maximum capacity of the firm is between 5,000,000 and 6,000,000 machine-hours. Bob considers a denominator level at half the low-end capacity to be reasonable. Furthermore, he believes that the unfavorable production volume variance should be capitalized (rather than written off against the current period's earnings) because the demand for the firm's products has been increasing rapidly. A conservative projection of the firm's sales places the total sales at a level that will require at least 5 million machine-hours in less than 5 years. Bob was able to show a substantial improvement in operating income after revising the cost data. He used the revised operating results in briefing financial analysts.
Required
1. Compute the net effect on operating income of the two changes made regarding fixed factory overhead.
2. Is it ethical for Bob to make the changes (Consult www.imanet.org.)
3. Do the provisions of GAAP regarding inventory costing (i.e., FASB ASC 330-10-30, previously SFAS No. 151 -available at www.fasb.org ) bear upon the current issue If so, how
4. How does the choice of the denominator volume level in setting (fixed) overhead application rates provide managers with an opportunity to manage earnings
Bob Evans, VP-Finance, believes that the denominator activity level of 50,000 machine hours is too low. The maximum capacity of the firm is between 5,000,000 and 6,000,000 machine-hours. Bob considers a denominator level at half the low-end capacity to be reasonable. Furthermore, he believes that the unfavorable production volume variance should be capitalized (rather than written off against the current period's earnings) because the demand for the firm's products has been increasing rapidly. A conservative projection of the firm's sales places the total sales at a level that will require at least 5 million machine-hours in less than 5 years. Bob was able to show a substantial improvement in operating income after revising the cost data. He used the revised operating results in briefing financial analysts.
Required
1. Compute the net effect on operating income of the two changes made regarding fixed factory overhead.
2. Is it ethical for Bob to make the changes (Consult www.imanet.org.)
3. Do the provisions of GAAP regarding inventory costing (i.e., FASB ASC 330-10-30, previously SFAS No. 151 -available at www.fasb.org ) bear upon the current issue If so, how
4. How does the choice of the denominator volume level in setting (fixed) overhead application rates provide managers with an opportunity to manage earnings
Explanation
This question doesn’t have an expert verified answer yet, let Examlex AI Copilot help.
Cost Management 6th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins
Why don’t you like this exercise?
Other Minimum 8 character and maximum 255 character
Character 255
