Answer:
Home Security Systems Division of National Home Products
Predetermined Overhead Rate for the division:
a. Cutting off 5% off the estimated direct labor-hours every year implies that the predetermined overhead rate will be higher than what it is supposed to be. Thus, as a higher rate is applied to overheads, the division will report over-applied overhead costs, which is used to reduce the Cost of Goods sold at the end of the year, and thus boost the net operating income.
b. Terri Ronsin should not go along with the general manager's request to reduce the direct labor-hours in the predetermined overhead rate computation to 420,000 as it is unethical with self-interest bias.
Explanation:
a) Data and Calculations:
Estimated direct labor-hours = 440,000
5% shaving = 22,000 (440,000 * 5%)
General manager's requested direct labor-hours = 420,000
Difference in estimated and requested = 20,000 direct labor-hours.
b) The predetermined overhead rate = Estimated total manufacturing overhead divided by the estimated total direct-labor-hours
