Determine the estimated direct labor, Accounting Basics

1. Shaving 5% of the estimated direct labor hours in the predetermined overhead rate will result a high overhead rate, which would likely result a high credit balance of overapplied overhead for the year. When managers increased the amount of direct labor hours, there is a likely related increase of factory supervisors, the factory space to be maintained, and factory supplied and utilities consumed which results to more actual cost. Thus there is a high degree of correlation between the quantity of direct labor used and the amount of manufacture overhead used. However, with the technology of machines which leads to machine hours, direct labor being reduced and manufacturing overhead increasing, the correlation between direct labor and manufacturing overhead began to wane. Therefore we see a cumulative effect of overapplying overhead all recognized in December when Manufacture Overhead is closed out of the cost of good sold. If we constantly close the balance every month or every quarter, overtime the balance would get smaller and smaller over the course of the year.

2. The question if Cristin Madsen should go along with the general manager's request really depends who she is working for. She may work for the general manager of the division or the corporate controller who may not necessarily know the outcome of shaving 5% of the estimated direct labor. It also seems out of the ordinary to Cristin of eliminating a "Christmas bonus" be such a bad idea. However, it's not for Cristin to decide.

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