CASE 2 Harry Potter has been appointed as a divisional controller at the Electronics Division of BMW Products. One of her main duties is to calculate the division’s predetermined overhead rate (POHR). Such a task is crucial, since POHR is used throughout the year and any under-applied or over-applied overhead is closed out to Cost of Goods Sold at fiscal year-end. The company’s allocation base across all its divisions is machine-hours. Having estimated next year’s total manufacturing overhead, Hopkins calculated the POHR, by dividing with the number of total machine-hours for the coming year, as projected by the production manager. Being sure about her assumptions and calculations, she went to the division’s manager, Harry Potter, for approval. Surprisingly, the manager suggested a modification in the allocation base, as per the following discussion: Harry: These are my calculations of next year’s POR. If you approve, we can update our job-order costing system accordingly for this year. Voldemort: Everything look just fine. However, I would like you to adjust the estimate of the total machine-hours downwards. Instead of 520,000 hours, how about cutting that to 500,000 hours? Harry: I believe we cannot adjust it. I liaised with the production management and she believes that the company will need about 520,000 machine-hours to meet the sales projections for the year. On top of this, even in the current year we will need at least 510,000 machine-hours. Voldemort: Harry, I am aware of these. I insist on the adjustment of the allocation base to around 500,000 hours. Your predecessor and I had an agreement to shave 5% or so off the estimated machine-hours every year. This approach yielded a ‘reserve’, which eventually triggered a big boost to net operating income in December, at fiscal year-end. We called it our Christmas bonus. Being able to pull off such a miracle at fiscal year-end kept our supervisors extremely happy. This system has worked well for many years, and I don’t want to change it now. Question 1. (I dont need help with this one but Im just sharing for reference) Explain how shaving 5% off the estimated machine-hours in the allocation base for the predetermined overhead rate usually results in a big boost in net operating income at the fiscal year end. (500 words) Question 2. (Need guidance on this one) Should Harry Potter go along with the general manager’s request to reduce the machine hours in the predetermined overhead rate computation to 500,000 machine-hours? (500 words)
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
CASE 2
Harry Potter has been appointed as a divisional controller at the Electronics Division of BMW Products. One of her main duties is to calculate the division’s predetermined
The company’s allocation base across all its divisions is machine-hours. Having estimated next year’s total manufacturing overhead, Hopkins calculated the POHR, by dividing with the number of total machine-hours for the coming year, as projected by the production manager.
Being sure about her assumptions and calculations, she went to the division’s manager, Harry Potter, for approval. Surprisingly, the manager suggested a modification in the allocation base, as per the following discussion:
Harry: These are my calculations of next year’s POR. If you approve, we can update our
Voldemort: Everything look just fine. However, I would like you to adjust the estimate of the total machine-hours downwards. Instead of 520,000 hours, how about cutting that to 500,000 hours?
Harry: I believe we cannot adjust it. I liaised with the production management and she believes that the company will need about 520,000 machine-hours to meet the sales projections for the year. On top of this, even in the current year we will need at least 510,000 machine-hours.
Voldemort: Harry, I am aware of these. I insist on the adjustment of the allocation base to around 500,000 hours. Your predecessor and I had an agreement to shave 5% or so off the estimated machine-hours every year. This approach yielded a ‘reserve’, which eventually triggered a big boost to net operating income in December, at fiscal year-end. We called it our Christmas bonus. Being able to pull off such a miracle at fiscal year-end kept our supervisors extremely happy. This system has worked well for many years, and I don’t want to change it now.
Question 1. (I dont need help with this one but Im just sharing for reference)
Explain how shaving 5% off the estimated machine-hours in the allocation base for the predetermined overhead rate usually results in a big boost in net operating income at the fiscal year end. (500 words)
Question 2. (Need guidance on this one)
Should Harry Potter go along with the general manager’s request to reduce the machine hours in the predetermined overhead rate computation to 500,000 machine-hours? (500 words)
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