Refer to the information in Problem 5.42. Suppose you work for a CPA firm and are part of the team auditing the financial statements of Flexible Manufacturers. You have been assigned the responsibility for auditing the allocation of overhead costs.
Labor-paced assembly ....... $25 per direct labor hour
Machine-paced assembly ..... $18 per machine hour
Quality testing .......... $2 per unit
Complete the following using U.S. generally accepted accounting principles (GAAP), international financial reporting standards (IFRS), or both, as instructed by your professor.
A. Assume the company uses separate overhead allocation rates for labor-paced assembly, machine-paced assembly, and quality testing.
1. Research financial accounting rules and determine whether the company’s method for allocating overhead cost to inventory complies with GAAP and/or IFRS.
2. Use T-accounts to document your understanding of the company’s overhead cost allocation method.
B. Suppose you learn that the company plans to change its method of accounting for overhead to use a single plant-wide overhead allocation rate. Research financial accounting rules and determine the following:
1. Whether a plant-wide overhead allocation rate complies with GAAP and/or IFRS.
2. The conditions under GAAP and/or IFRS that must be met for the company to change its accounting method from using separate department overhead allocation rates to a single plant-wide allocation rate.
C. Suppose the company’s policy is to include all over-applied or under-applied overhead as part of cost of goods sold on the income statement. As an auditor, would you consider this policy to be acceptable? Why or why not?