Case 1 :

Required: 1. Explain how shaving 5% off the estimated direct labour-hours in the base for the predetermined overhead rate usually results in a big boost in net operating income at the end of the fiscal year? 2. Should Chris Ronsin go along with the general manager?s request to reduce the direct labour hours in the predetermined overhead rate computation to 420,000 direct labourhours?

Case 2

You have been hired as a consultant by Cassanitti to advise him in his decision. Write a memo to Cassanitti commenting on the costs of space and supervisory salaries included in the controller? cost analysis. Explain in your memo about the ?real? costs of the space occupied by the Printer Case Department and the supervisor?s salary. What types of costs are these? 2. Independently of your response to requirement (1), suppose that CompTech?s controller had been approached by his friend Jack Westford, the assistant supervisor of the Printer Case Department. Westford is worried that he will be laid off if the Printer Case Department is closed down. Westford has asked his friend to understate the cost savings from closing the department, in order to slant the production manager?s decision toward keeping the department in operation. Comment on the controller?s ethical responsibilities

Case 1 Chris Ronsin had recently been transferred to the Home Security Systems Division of National Home Products. Shortly after taking over her new position as divisional controller, she was asked to develop the division's predetermined overhead rate for the upcoming year. The accuracy of the rate is of some importance, since it is used throughout the year and any over applied or under applied overhead is closed out to Cost of Goods Sold at the end of the year. National Home Products uses direct labourhours in all of its divisions as the allocation base for manufacturing overhead. To compute the predetermined overhead rate, Chris divided her estimate of the total manufacturing overhead for the coming year by the production manager's estimate of the total direct labour hours for the coming year. She took her computations to the division's general manager for approval but was quite surprised when he suggested a modification in the base. Her conversation with the general manager of the Home Security Systems Division, Harry Irving, went like this: Ronsin: Here are my calculations for next year's predetermined overhead rate. If you approve, we can enter the rate into the computer on January 1 and be up and running in the job-order costing system right away this year. Irving: Thanks for coming up with the calculations so quickly, and they look just fine. There is, however, one slight modification I would like to see. Your estimate of the total direct labour hours for the year is 440,000 hours. How about cutting that to about 420,000 hours? Ronsin: I don't know if I can do that. The production manager says she will need about 440,000 direct labour-hours to meet the sales projections for the year. Besides, there are going to be over 430,000 direct labour-hours during the current year and sales are projected to be higher next year. Irving: Chris, I know all of that. I would still like to reduce the direct labour-hours in the base to something like 420,000 hours. You probably don't know that I had an agreement with your predecessor as divisional controller to shave 5% or so off the estimated direct labour-hours every year. That way, we kept a reserve that usually resulted in a big boost to net operating income at the end of the fiscal year in December. We called it our Christmas bonus. Corporate headquarters always seemed as pleased as punch that we could pull off such a miracle at the end of the year. This system has worked well for many years, and I don't want to change it now. Required: 1. Explain how shaving 5% off the estimated direct labour-hours in the base for the predetermined overhead rate usually results in a big boost in net operating income at the end of the fiscal year? 2. Should Chris Ronsin go along with the general manager's request to reduce the direct labour hours in the predetermined overhead rate computation to 420,000 direct labourhours? Case 2 CompTech, Inc. manufactures printers for use with home computing systems. The firm currently manufactures both the electronic components for its printers and the plastic cases in which the devices are enclosed. Jim Cassanitti, the production manager, recently received a proposal from Universal Plastics Corporation to manufacture the cases for CompTech's printers. If the cases are purchased outside, CompTech will be able to close down its Printer Case Department. To help decide whether to accept the bid from Universal Plastics Corporation, Cassanitti asked CompTech's controller to prepare an analysis of the costs that would be saved if the Printer Case Department were closed. Included in the controller's list of annual cost savings were the following items: Building rental (The Printer Case Department occupies one-sixth of the factory building, which CompTech rents for $180,600 per year.) ..... ..$30,100 Salary of the Printer Case Department supervisor ..... $48,000 In a lunchtime conversation with the controller, Cassanitti learned that CompTech was currently renting space in a warehouse for $41,000. The space is used to store completed printers. If the Printer Case Department were discontinued, the entire storage operation could be moved into the factory building and occupy the space vacated by the closed department. Cassanitti also learned that the supervisor of the Printer Case Department would be retained by CompTech even if the department were closed. The supervisor would be assigned the job of managing the assembly department, whose supervisor recently gave notice of his retirement. All of CompTech's department supervisors earn the same salary. Required: 1. You have been hired as a consultant by Cassanitti to advise him in his decision. Write a memo to Cassanitti commenting on the costs of space and supervisory salaries included in the controller' cost analysis. Explain in your memo about the \"real\" costs of the space occupied by the Printer Case Department and the supervisor's salary. What types of costs are these? 2. Independently of your response to requirement (1), suppose that CompTech's controller had been approached by his friend Jack Westford, the assistant supervisor of the Printer Case Department. Westford is worried that he will be laid off if the Printer Case Department is closed down. Westford has asked his friend to understate the cost savings from closing the department, in order to slant the production manager's decision toward keeping the department in operation. Comment on the controller's ethical responsibilities