P4-45

Luke Bolton joined Jackson Enterprises as controller in October 2016.

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Jackson 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.

Bolton is eager to impress his new employer, and he knows that in 2017, Jackson'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, Bolton decides to adjust the manufacturing overhead rate to 170% 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:

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Direct materials control, 1/1/2017

26,000

Direct materials purchased, 2017

620,000

Direct materials added to production, 2017

600,000

Work in process control, 1/1/2017

230,000

Direct manufacturing labor, 2017

930,000

Cost of goods manufactured, 2017

3,020,680

Finished goods control, 1/1/2017

179,000

Finished goods control, 12/31/2017

323,840

Manufacturing overhead costs, 2017

1,400,000

Jackson's revenue for 2017 was $ 5 comma 244 comma 000, and the company's selling and administrative expenses were $ 2 comma 530 comma 000.

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1.

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

a.

Direct materials control,

12/31/20172017

b.

Manufacturing overhead allocated, 20172017

c.

Cost of goods sold, 20172017

2.

Calculate the amount of under- or overallocated manufacturing overhead.

3.

Calculate

JacksonJackson'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.

BoltonBolton

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

20172017

back in late

20162016?

Refer to the IMA Statement of Ethical Professional Practice.

Requirement 1. Insert the given information in the T-accounts below. Calculate the following amounts to complete the T-accounts: (a) Direct materials control,

12/31/20172017,

(b) Manufacturing overhead allocated,

20172017,

and (c) Cost of goods sold,

20172017.

(Abbreviations used: COGM = cost of goodsmanufactured, COGS = cost of goods sold, Dir = direct, Dir. Matls = direct materials, MOH = manufacturing overhead, and OH = overhead.)