XKY Manufacturing has recently opened a plant in Costa Melon in order to take advantage of certain tax benefits. In order to qualify for these tax benefits, the company’s direct manufacturing labour costs must be at least 20% of total manufacturing costs for the period.
XKY Manufacturing normally classifies direct manufacturing labour wages as direct manufacturing labour, but classifies fringe benefits, overtime premiums, idle time, and vacation time and sick leave as indirect manufacturing labour.
During the first period of operations in Costa Melon, XKY incurs a total of $2,500,000 in manufacturing costs. Of that, $410,000 is direct manufacturing labour wages, $45,000 is overtime premium, $86,000 is fringe benefits, $20,500 is vacation time and sick leave, and $10,900 is idle time.
REQUIRED
1. Will XKY’s direct manufacturing labour costs qualify them for the tax benefit?
2. Buyoung Kim, the manager of the new Costa Melon plant, is concerned that she will not get a bonus this year because the plant will not get the tax benefit. What might she ask the plant controller to do to make sure XKY gets the tax benefit? How might these accounting changes be rationalized?
3. Should the plant controller do what the manager has asked in requirement 2? Why or why not?