Rob Ingster, controller of Barwith Industries Inc., was wrestling with a problem raised by his boss, Peter Etherington, president of the company. The applied overhead was underapplied by 25 per- cent of the actual overhead for the year and the reported results for the year had been severely impacted by the adjustment of this amount to Cost of Goods Sold at year-end. The adjustment in the current year was similar to the adjustment in the past three years, so Rob knew that a serious problem had to be addressed. Etherington wanted to know how this had happened and what Rob was going to do to ensure that he was not surprised by such a large adjustment in the future.
Required:
Prepare a one-page memo explaining the probable reasons behind the significant adjustment and what steps should be taken in the future to avoid it happening again.