- Terri Ronsin, the new divisional controller of National Home Products' Home Security Systems Division, was asked to develop the predetermined overhead rate for the upcoming year using direct labor hours as the allocation base. - However, her general manager Harry Irving suggested reducing the estimated direct labor hours from 440,000 to 420,000. Irving explained that the previous controller had agreed to reduce labor hours by 5% each year to boost end-of-year profits. - The case discusses the operational and ethical implications of Terri either agreeing or disagreeing with the general manager's request to manipulate the overhead rate calculation for deceptive financial reporting purposes.

1. DEVRY ACCT 505 Week 2 Case 3-29 Ethics and the
Manager NEW
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CASE 3–29 Ethics and the Manager [Course
Objective B] Terri Ronsin had recently been
transferred to the Home Security Systems Division
of National Home Products. Shortly after taking
over her new position as divisional controller, she
was asked to develop the division’s predetermined
overhead rate for the upcoming year. The accuracy
of the rate is important because it is used
throughout the year and any overapplied or
underapplied over- head is closed out to Cost of
Goods Sold at the end of the year. National Home
Products uses direct labor-hours in all of its
divisions as the allocation base for manufacturing

2. overhead.
To compute the predetermined overhead rate,
Terri divided her estimate of the total
manufacturing overhead for the coming year by
the production manager’s estimate of the total
direct labor-hours for the coming year. She took
her computations to the division’s general
manager for approval but was quite surprised
when he suggested a modification in the base. Her
conversation with the general manager of the
Home Security Systems Division, Harry Irving,
went like this:
Ronsin: Here are my calculations for next year’s
predetermined overhead rate. If you approve, we
can enter the rate into the computer on January 1
and be up and running in the job-order costing
system right away this year.
Irving: Thanks for coming up with the calculations
so quickly, and they look just fine. There is, how-
ever, one slight modification I would like to see.
Your estimate of the total direct labor-hours for
the year is 440,000 hours. How about cutting that
to about 420,000 hours?
Ronsin: I don’t know if I can do that. The
production manager says she will need about
440,000 direct labor-hours to meet the sales
projections for the year. Besides, there are going to

3. be over 430,000 direct labor-hours during the
current year and sales are projected to be higher
next year.
Irving: Teri, I know all of that. I would still like to
reduce the direct labor-hours in the base to some-
thing like 420,000 hours. You probably don’t know
that I had an agreement with your predecessor as
divisional controller to shave 5% or so off the
estimated direct labor-hours every year. That way,
we kept a reserve that usually resulted in a big
boost to net operating income at the end of the
fiscal year in December. We called it our Christmas
bonus. Corporate headquarters always seemed as
pleased as punch that we could pull off such a
miracle at the end of the year. This system has
worked well for many years, and I don’t want to
change it now.
Required:
Assume the following information:
Direct Materials $40 per unit
Direct Labor $20 per unit
Total Estimated Manufacturing Overhead
$8,400,000
Manufacturing overhead is allocated based on
estimated direct-labor hours.
Each unit of product requires 1 direct labor hour.

4. 1. Calculate the cost of one unit of product,
assuming that the overhead per unit is based on
Terri Ronson’s estimate of 440,000 hours. (Round
all dollar figures to two decimal places.)
a. If 441,000 units were produced, how much
overhead was applied to work in process.
2. Calculate the cost of one unit of product,
assuming that the overhead per unit is based on
her supervisors preferred estimate of 420,000
hours. (Round all dollar figures to two decimal
places.)
a. If 441,000 units were produced, how much
overhead was applied to work in process.
3. During the year, the company produced and sold
441,000 units, and incurred actual overhead of
$8,500,000, what is the under/overapplied
overhead if:
a. The estimated Direct Labor Hours is 440,000.
b. The estimated Direct Labor Hours is 420,000.
c. All over-applied and under-applied overhead
applied directly to cost of goods sold. Assume that
the company had $1,000,000 in net operating
income before the over/under applied overhead
adjustment is made. What is the revised net
income after the over/underapplied overhead
adjustment?

5. 4. Should Terri Ronson go along with the general
manager’s request to reduce the direct labor hours
in the predetermined overhead rate computation
to 420,000 hours? Be sure to discuss the
operational and ethical issues related to this
decision.
Deliverables:
1. Submit an Excel spreadsheet that documents the
calculations made for steps 1-3 above. All items
should be clearly labeled, and appropriate
formulas should be used to perform your
calculations.
2. For step 4, submit a 5-7 minute narrated
PowerPoint (preferably using VoiceThread) that
highlights your discussion of the operational and
ethical issues that Teri is facing as a result of the
request to reduce the direct labor hours. Be sure
to make a recommendation in regard to making
this decision. The presentation should be 3-4
slides.
3. Post your PowerPoint and workbook on behalf
of your team to the Week 2 Dropbox for the case
study.
4. NOTE: as a team project, a team collaboration
tool (such as Cisco Spark) should be used for the
students to collaborate on the project!