Where Should the Accountant Place His Loyalty?

Robert McDonald

University of New Haven ___________________________________________________________________

Gabe Resnick had just moved into his new position of division controller of Adelco Products. He submitted his calculation of next year’s overhead rate and the division general manager asked to review his calculations. The general manager wanted to take advantage of the division’s practice of writing off over or under applied overhead at year end in one lump sum to cost of goods sold. The general manager asked Gabe to reduce the estimate for direct labor hours used in the overhead rate calculation. Gabe had two bosses- the corporate controller and the division general manager. Gabe was torn between following the general manager’s request or reporting the distortion to the corporate controller. _____________________________________________________________________________

Gabe Resnick thought he was settling into his new office and job as division controller at Adelco Products, a division of Steelcom Metals. Gabe was promoted from assistant accounting manger at corporate accounting to division controller at Adelco, which was the smallest division of seven divisions of Steelcom. Gabe has spent five years in a range of accounting jobs in general ledger, budgeting, and cost accounting at the corporate level. He was not sure he was ready for a division controller position, but he took comfort in the smaller, manageable size of Adelco and the support from the corporate controller’s office.

He was two weeks on the job, moving in and adjusting to his new job, and he had completed one assignment. It was late November and he was finishing work on the manufacturing overhead rate calculation for next year. Adelco followed corporate accounting policy and used direct labor hours as the basis for applying manufacturing overhead. Gabe estimated the total overhead by reviewing the growth rates for each of 20-line items (repairs, supplies, depreciation…) for the past 3 years. His estimate for next year’s total overhead was $3,103,100. The budgeting process at Adelco was participative, that is, all department managers had a part in estimating and managing the yearly budget. Gabe asked the manufacturing manager for her estimate of direct labor hours needed for next year. Within a day she provided her estimate of 91,000 direct labor hours. Gabe took his overhead estimate and her estimate for direct labor hours and sent an email to the division general manager and corporate accounting with the final overhead rate: $3,103,100/91,000 hours or $34.10 per direct labor hour.

Last November the overhead calculation was $2,986,000/86,800 = $34.40. Gabe’s new estimate for overhead is 3.9% higher than last year, and the direct labor estimate is 4.8% higher than last year’s estimate.

The overhead rate calculation was important for costing the products produced and in setting product prices.

A day after he submitted his overhead memo to the general manager, Bill Oliver, the general manager, requested a meeting with Gabe.Read the case and answer the q’s at the end of the case.

Due in 12 hours.