Scenario: You were recently hired as comptroller for a division in a prominent manufacturing company. You have been asked to calculate the predetermined overhead rate for your division to use in the upcoming year. It is important that the rate be accurate because any resulting over-applied or under-applied overhead is closed out to Cost of Goods Sold at the end of the year. The allocation base for your division is machine hours. You began by estimating the total manufacturing overhead costs you expected the division to incur in the upcoming year. Then you divided that figure by the estimate of the total machine hours that the production manager thought would be required to produce the divisions product and arrived at the pre-determined overhead rate for the division.

But when you took the rate to the General Manager, he asked you to rework the calculations and reduce the machine hours estimated by the production manager from 505,000 to 484,800. He explained that it has always been done that way and at the end of the year, when adjusting entries are made, the division appears to have had a large increase in net operating income. Your initial post is due by 11:59 p.m. Tuesday, March 20, 2018 and provide your response to:

1. BRIEFLY explain why reducing the estimated machine hours in the base for the predetermined overhead rate results in a large increase of the net operating income at the end of the fiscal year? (Include discussion about how how such a change affects the rate, and what happens to product costs if that rate is applied throughout the year, and any adjustment needed at the end of the fiscal year, and then use this information in your explanation.)

2. BRIEFLY explain why you should or should not comply with the managers request? (Your response should recognize and explain an ethical dilemma.)