Refer to the information in Problem 5.48. Suppose you work for a CA 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.
Problem 5.48
Flexible Manufacturers Inc. produces small batches of customized products.
The accounting system is set up to allocate plant overhead to each job using the following production cost pools and overhead allocation rates:
Labour-paced assembly............... $25 per direct labour hour
Machine-paced assembly.................. $18 per machine hour
Quality testing.............................................$2 per unit
The following actual resources were used for Job 75:
Direct labour hours.................. 3 hours
Machine hours.................... 1.25 hours
Number of units.....................36 units
The plant accountant wants to simplify the cost accounting system and use a plant-wide rate. If the preceding costs are grouped into a single cost pool and allocated based on labour hours, the rate would be $35 per direct labour hour.
REQUIRED
A. Assume that the company uses separate overhead allocation rates for labour-paced assembly, machine-paced assembly, and quality testing.
1. Research fi nancial accounting rules and determine whether the company's method for allocating overhead cost to inventory complies with 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 fi nancial accounting rules and determine the following:
1. Whether a plant-wide overhead allocation rate complies with IFRS.
2. The conditions under 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 overapplied or underapplied 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?