Question 2: Overhead Cost Allocation Earlier this year, Emma Carberry was transferred to Acclaimed Homewares' Appliances Division. Upon taking over her new position as divisional controller, she was asked to set the division's predetermined overhead rate for the coming year.The accuracy of the rate is important as it will be used throughout the whole yearand at the end of the year any overapplied or underapplied overhead will be closed out to Cost of Goods Sold. In all of its divisions, Acclaimed Homewares allocates manufacturing overhead based on direct labour hours. Emma calculated the predetermined overhead rate by dividing her estimate of manufacturing overhead by the production manager's estimate of direct labour hours. When she presented her calculations to the division's general manager, he suggested modifying the base. Her conversation with David Ivers, general manager of the Appliances Division, went like this: Emma: I have calculated the predetermined overhead rate for next year. If you approve, then we can enter the rate into the computer on January 1 and we will be able to start using the job order costing system immediately this year. Ivers: It's great that you were able to come up with the calculations so quickly, and they look great. However, I would like to suggest one slight modification. Yourestimate of the total number of direct labour hours for the year is 110,000 hours. What about cutting that down to about 105,000 hours? Emma: I am not sure if I will be able to do that. According to the production manager, she will require approximately 110,000 direct hours of labour-time to meet the sales projections for next year. In addition, over 108,000 direct labour hours will be worked during the current year, and there is a prediction of higher sales in thenext year. Ivers: Emma, I am aware of all of that. It would still be nice if I could reduce thedirect labour-hours in the base to something like 105,000 hours. As you are probably unaware, I had an agreement with your predecessor as divisional controller to shave 5% or so off the estimated direct labor-hours each year. In this way, we were able to keep a reserve, which usually led to a large increase in net operating income at the end of the fiscal year. We referred to it as our year-end bonus. Whenever we pulled off such a miracle at the end of the year, corporate headquarters seemed delighted. Ido not intend to change this system, as it has worked well for many years. Page 7 of 10 Required 1. A reduction of 5% in the estimated direct labour hours in the base for the predetermined overhead rate usually results in an increase in net operating incomeat the end of the fiscal year. Give an explanation of how this could have happened. 2. Should Emma go along with the general managers request to reduce the direct labour-hours in the predetermined overhead rate computation to 105,000 direct labour-hours? Refer to the fundamental principles of Chartered Institute of Management Accountants (CIMA) code of ethics to support your answer. CIMAs Code of Ethics can be accessed through the following website. https://www.cimaglobal.com/Professionalism/Ethics/CIMA-code-ofethics-for- professional-accountants/ What steps should Emma take to resolve this issue?