Fraud is not an accounting problem - it is a social phenomenon. ...

[vicotolentino]

Fraud is not an accounting problem - it is a social phenomenon. Explain.
 
  What will be an ideal response?

Question 2

Allocation and proration of overhead.
 
  InStep Company prints custom training material for corporations. The business was started January 1, 2014. The company uses a normal-costing system. It has two direct cost pools, materials and labor, and one indirect cost pool, overhead. Overhead is charged to printing jobs on the basis of direct labor cost. The following information is available for 2014.
 
  Budgeted direct labor costs 225,000
  Budgeted overhead costs 315,000
  Costs of actual material used 148,500
  Actual direct labor costs 213,500
  Actual overhead costs 302,100
 
  There were two jobs in process on December 31, 2014: Job 11 and Job 12. Costs added to each job as of December 31 are as follows:
 
   Direct materials Direct labor
  Job 11 4,870 5,100
  Job 12 5,910 6,800
 
  InStep Company has no finished goods inventories because all printing jobs are transferred to cost of goods sold when completed.
 
  Required:
  1. Compute the overhead allocation rate.
  2. Calculate the balance in ending work in process and cost of goods sold before any adjustments for under- or overallocated overhead.
  3. Calculate under- or overallocated overhead.
  4. Calculate the ending balances in work in process and cost of goods sold if the under- or overallocated overhead amount is as follows:
  a. Written off to cost of goods sold
  b. Prorated using the overhead allocated in 2014 (before proration) in the ending balances of cost of goods sold and work-in-process control accounts
  5. Which of the methods in requirement 4 would you choose? Explain.

[aloop]

Answer to Question 1

Forensic accounting is rooted in law and economics, not psychology or criminology. Thus, the interest in why people commit fraud, especially when conducting a fraud investigation, is explanatory (cause and effect), not predictive. Applying traditional economic theory, it is proposed that people commit fraud when the perceived reward () is greater than the probable loss-the calculus of fraud. Because fraud investigators are called in after a suspicion of fraud has been identified, the focus is who, when, how, and how much-not why.

Answer to Question 2

1. Budgeted overhead rate = Budgeted overhead costs  Budgeted labor costs
= 315,000  225,000 = 140 of labor cost

2. Ending work in process
Job 11 Job 12 Total
Direct material costs  4,870  5,910 10,780
Direct labor costs 5,100 6,800 11,900
Overhead
(1.40  Direct labor costs) 7,140 9,520 16,660
Total costs 17,110 22,230 39,340
Cost of goods sold = Beginning WIP + Manufacturing costs  Ending WIP
= 0 + 148,500 + 213,500 + (213,500  1.40)  39,340 = 621,560

3. Overhead allocated = 1.40  213,500 = 298,900
Underallocated overhead = Actual overhead  Allocated overhead
= 302,100  298,900 = 3,200 underallocated

4a. All underallocated overhead is written off to cost of goods sold.
WIP inventory remains unchanged.
Account
(1) Dec. 31, 2014
Account Balance
(Before Proration)
(2) Write-off of 3,200
Underallocated overhead
(3) Dec. 31, 2014
Account Balance
(After Proration)
(4) = (2) + (3)
Work in Process  39,340  0  39,340
Cost of goods sold 621,560 3,200 624,760
660,900 3,200 664,100

4b. Underallocated overhead prorated based on overhead allocated before proration.

Account
(1) Dec. 31, 2014
Account
Balance
(Before
Proration)
(2) Allocated Overhead
Included in
Dec. 31, 2014
Account Balance
(Before Proration)
(3) (4) Proration of 3,200
Underallocated
Manufacturing Overhead
(5) Dec. 31, 2014
Account
Balance
(After Proration)
(6) = (2) + (5)
Work in Process  39,340  16,660a (5.57) 0.0557  3,200 =  178  39,518
Cost of Goods Sold 621,560 282,240b (94.43) 0.9443  3,200 = 3,022 624,582
Total 660,900 298,900 100 3,200 664,100
a11,900  1.40; b(213,500  11,900)  1.40

5. Writing off all of the underallocated overhead to Cost of Goods Sold (CGS) is warranted when CGS is large relative to Work-in-Process Inventory and Finished Goods Inventory and the underallocated overhead is immaterial. Both these conditions apply in this case. InStep Company should write off the 3,200 underallocated overhead to Cost of Goods Sold account.