Fancy Glassware is a producer of heirloom-quality glassware. The company has a solid reputation and is widely regarded as a model corporate citizen. Your friend began working for the company last year as a financial analyst and has recently begun to question the company’s squeaky-clean image. Because you graduated with an accounting degree from a well regarded university, your friend has asked you to look over Fancy Glassware’s income statement and answer a few questions. The income statement appears as follows:
Fancy Glassware, Inc.
Statement of Income
For the year ended October 31, 2009
Sales revenue .............. $12,008,450
Cost of goods sold ........... 8,475,361
Gross profit .............. 3,533,089
Selling & administrative expenses ..... 1,845,902
Net income .............. $1,687,187
Fancy Glassware, Inc.
Manufacturing Overhead Schedule
For the year ended October 31, 2009
Indirect labor ............. $ 743,012
Supplies ............... 41,950
Advertising ............... 210,375
Equipment depreciation ........... 96,210
Factory depreciation .......... 32,900
Factory insurance ........... 22,420
Property taxes ............. 18,600
Utilities ............... 27,100
Management salary allocation ...... 194,800
Total manufacturing overhead ...... $1,387,367

You are a little surprised to see the inclusion of advertising expense in the manufacturing overhead schedule and you really have no idea why the “management salary allocation” would be considered overhead.

Required
A. Where would you expect to see advertising expense included on an income statement? Does the inclusion of advertising in the overhead amount seem reasonable to you? Why might Fancy Glassware want to include advertising expense in manufacturing overhead?
B. Your friend explains to you that the “management salary allocation” is the result of a corporate strategy of requiring that each part of the business bear some of the costs associated with management’s functions. You learn that none of the salary allocation relates to management members who are associated with production operations. Is the inclusion of the salary allocation legitimate?
C. What is the financial statement impact of including advertising expenses and an allocation for management’s salaries in manufacturing overhead?