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.

Required

1. Insert the given information in the T-accounts below. 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

2. Calculate the amount of under- or overallocated manufacturing overhead.
3. Calculate Anderson'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.
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.

Transcribed Image Text:

Direct Materials Control Work-in-Process Control Finished Goods Control Manufacturing OH Control Manufacturing OH Allocated Cost of Goods Sold