Sarah's Overhead Dilemma

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Sarah's Overhead DilemmaQuestion 1Anytime you reduce your denominator while your numerator stays constant, the decimal form of that fraction becomes a larger number. This is how shaving 5% off of the estimated hours in the base for overhead rate calculation results in a boost in the net income at the end of the year. By reducing the base, the overhead rate per hour increases. For example, if the estimated total overhead costs are $5,000,000 and the estimated total labor hours for the year are 440,000 then the overhead rate would be $ll.6 per hour since $5,000000/440,000 hours equals $11.6 dollars per hour. However, if the estimated total overhead costs remain at $5,000,000 and the estimated labor hours are reduced by 5%, making it only 418,000 hours, then the overhead rate per hour increases to $11.6 dollars per hour. When the overhead rate is increased, it results in overapplied overhead which, when adjusted for at the end of the year, reduces cost of goods sold therefore boosting net income. For example, if the overhead rate is $11.6 per hour and the total labor hours estimate is correct at 440,000 hours, then applied overhead is (440,000 X 11.6) $5,5,400 dollars. Since actual overhead costs are only $5,000,000 that would mean that overapplied overhead is $5,400. At the end of the year, this difference is adjusted by reducing the cost of goods sold by $5,400 resulting in a more than a quarter of a million dollar increase for net income.Question

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The way the problem is worded makes the manager sound like he is doing something wrong or unethical, but in reality he is not. In real life there are always uncertainties, overhead costs and labor estimates more often than not go up and having a cushion would be a good thing. It usually always costs more and takes longer than expected to produce something. It also stated in the problem that sales were expected to increase so having a 5% cushion is not at all unreasonable. It has been working for a number of years and it is not unreasonable to create a safety margin. So if I was Sarah I would go ahead and reduce the labor hours in my computation. Please note that this sample paper on Sarah's Overhead Dilemma is for your review only. In order to eliminate any of the plagiarism issues, it is highly recommended that you do not use it for you own writing purposes. In case you experience difficulties with writing a well structured and accurately composed paper on Sarah's Overhead Dilemma, we are here to assist you. Your persuasive essay on Sarah's Overhead Dilemma will be written from scratch, so you do not have to worry about its originality.

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