Please explain this case study

Beamplain how shaving 5% off the estimated direct labor-hours in the base for the predetermined overhead rate usually results in a big boost in net operating income at the and of the fiscal year. 2. Should Cristin Madsen go along with the general manager's request to reduce the direct labor-hours in the predetermined overhead rate computation to 106,000 direct labor-hours? SOLUTION 1. Shaving 9%% off the estimated direct labor-hours in the predetermined overhead rate will result in an artificially high overhead rate, which is likely to result in overapplied overhead for the year. The cumulative effect of overapplying the overhead throughout the year is all recognized in December when the balance in the Manufacturing Overhead account is closed out to Cost of Goods Sold. If the balance were closed out every month or every quarter, this effect would be dissipated over the course of the year . .. A tufor is reviewing your question. View Question Details Z 2. This question may generate lively debate. Where should Cristin Madsen's loyalties lie? Is she working for the general manager of the division or for the corporate controller? Is there anything wrong with the "Christmas bonus"? How far should Criscin go In bucking her boss on a new job? While individuals can certainly disagree about what Cristin should do, some of the facts are indisputable, First, the practice of understating direct labor-hours results in artificially inflating the overhead rate. This has the effect of inflating the cost of goods sold figures in all months prior to December and overstating the costs of inventories. In December, the adjustment for overapplied overhead provides a big boost to net operating income. Therefore, the practice results in distortions in the pallem of net operating Income over the year. In addition, since all of the adjustment is taken to Cost of Goods Sold, inventories are still overstated at year end. This Need the answer? 4566 tutors online. Answers in as fast as 15 Get it-with an minutes. explanation means that retained earnings is also overstated. While Cristin is in an extremely difficult position, her responsibilities under the IMA's Statement of Ethical Professional Practice seem to be clear. The Credibility standard states that management accountants have a responsibility to "disclose all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, analyses, or recommendations," Cristin should discuss this situation with her immediate supervisor in the controller's office at corporate headquarters. This step may bring her into direct conflict with the general manager of the division, so it would be a very difficult decision for her to make. In the actual situation that this case is based on, the corporate controller's staff were aware of the general manager's accounting tricks, but top management of the company supported the general manager because "he comes through with the results" and could be relied on to hit the annual profit cargets for his division. Personally, we would be very uncomfortable supporting a manager who will reson to deliberate distortions to achieve "results." If the manager will pull tricks in this area, what else might be be doing that is questionable or even perhaps illegal