QUESTION 3 (25 MARKS: 100 MINUTES) Mr. Danial joined Supersolar Sdn Bhd (SSB) as controller in October 2019. SSB manufactures and installs home solar panel. SSB has shown high profit for the past few years, indeed some big companies have revealed their interest in SSB. However, in the first quarter of 2020, the demand started to show decreasing trend. It is essentially due to the COVID-19 pandemic, whereby people are making less spending on accessories. In 2019, manufacturing overhead was applied to jobs at 150% of direct manufacturing labor cost. At the end of 2019, an immaterial amount of underapplied overhead was closed out to cost of goods sold, and the company showed a small loss. Mr. Danial is eager to impress his new employer, and he knows that in 2020, SSB's upper management is under pressure to show a profit in a challenging competitive environment. 3 BKAM 2013 MANAGEMENT ACCOUNTING I Moreover, the SSB's management teams are hoping to be acquired by a large private equity firm sometime in 2021. At the end of 2019, Mr. Danial decides to adjust the manufacturing overhead rate to 160% of direct labor cost. He explains to the company's president that this adjustment is necessary because overhead was underapplied in 2019. Cost information for 2020 follows: Direct materials, 1/1 Direct materials purchased Direct materials added to production Work in process, 1/1 Direct labor Indirect labor Rent on building* Depreciation on factory equipment Utilities for factory Insurance** Building maintenance* Sales commission (25% of sales amount) Salary of sales supervisor Salary of salesmen Salary of factory technicians Training & travelling for operators (RM) 25,000 650,000 630,000 280,000 880,000 340,000 90,000 45,000 24,500 20,160 42,500 ? 180,000 450,000 72,000 120,000 Promotion campaign Other manufacturing overhead General administration expenses Finished goods, 1/1 Finished goods, 31/12 Sales revenue 350,000 579,890 307,950 320,000 290,000 5,550,000 Note: ** Allocated based on area occupied 70% is for factory, 30% is for administration ** Allocated based on number of employees: 32 employees work in factory, another 10 are for administration and marketing. REQUIRED: (a) Compute the following: (Note: Students may use T-accounts to show the cost flow as shown below.) (i) Direct materials, 31/12/2020 (ii) Manufacturing overhead applied 4 BKAM 2013 MANAGEMENT ACCOUNTING I (iii) Cost of goods sold (4 Marks) Raw Materials Work-in-Process Finished Goods Inventory Manufacturing Overhead Cost of Goods Sold (b) Prepare a Schedule of Cost of Goods Manufactured for the year ended 2020. (6 Marks) (C) Prepare an income statement for the year ended 2020. (5 Marks) (d) Compute SSB's net operating income under the following: (i) Assuming that the under/overapplied manufacturing overhead is written off to cost of goods sold. (4 Marks) (ii) Assuming the under/overapplied manufacturing overhead is distributed (prorated) based on the ending balances in work in process, finished goods, and cost of goods sold. (3 Marks) (e) Mr. Danial chooses option (d) (i) above, stating that the amount is immaterial, (i) Comment on the ethical implications of his choice. Discuss if there were any ethical issues when he established the manufacturing overhead rate for 2020 back in late 2019. Refer to the standards of ethical conduct (IMA Statement of Ethical Professional Practice). (3 Marks) END OF QUESTIONS 5
