Chapter 3, Problem 2MC

Huron Manufacturing Co. uses a job order cost system to cost its products. It recently signed a new contract with the union that calls for time-and-a-half for all work over 40 hours a week and double-time for Saturday and Sunday. Also, a bonus of 1% of the employees’ earnings for the year is to be paid to the employees at the end of the fiscal year. The controller, the plant manager, and the sales manager disagree as to how the overtime pay and the bonus should be allocated.

An examination of the first month’s payroll under the new union contract provisions shows the following:

Analysis of the supporting payroll documents revealed the following:

1. a. More production was scheduled each day than could be handled in a regular workday, resulting in the need for overtime.
2. b. The Saturday and Sunday hours resulted from rush orders with special contract arrangements with the customers.

The controller believes that the overtime premiums and the bonus should be charged to factory overhead and spread over all production of the accounting period, regardless of when the jobs were completed.

The plant manager favors charging the overtime premiums directly to the jobs worked on during overtime hours and the bonus to administrative expense.

The sales manager states that the overtime premiums and bonus are not factory costs chargeable to regular production but are costs created from administrative policies and, therefore, should be charged only to administrative expense.

Required:

1. 1. Evaluate each position—the controller’s, the plant manager’s, and the sales manager’s. If you disagree with all of the positions taken, present your view of the appropriate allocation.
2. 2. Prepare the journal entries to illustrate the position you support, including the accrual for the bonus.