17 Jun IS THE INCLUSION OF THE SALARY ALLOCATION LEGITIMATE?
Fancy Glassware is a producer of heirloom-quality glassware. The company has a solid reputation and is widely regarded as a model corporate citizen. Your friend began working for the company last year as a financial analyst and has recently begun to question the company’s squeaky-clean image. Because you graduated with an accounting degree from a well regarded university, your friend has asked you to look over Fancy Glassware’s income statement and answer a few questions. The income statement appears as follows: Fancy Glassware, Inc. Statement of Income For the year ended October 31, 2009 Sales revenue ………….. $12,008,450 Cost of goods sold ……….. 8,475,361 Gross profit ………….. 3,533,089 Selling & administrative expenses ….. 1,845,902 Net income ………….. $1,687,187 Fancy Glassware, Inc. Manufacturing Overhead Schedule For the year ended October 31, 2009 Indirect labor …………. $ 743,012 Supplies …………… 41,950 Advertising …………… 210,375 Equipment depreciation ……….. 96,210 Factory depreciation ………. 32,900 Factory insurance ……….. 22,420 Property taxes …………. 18,600 Utilities …………… 27,100 Management salary allocation …… 194,800 Total manufacturing overhead …… $1,387,367
You are a little surprised to see the inclusion of advertising expense in the manufacturing overhead schedule and you really have no idea why the “management salary allocation” would be considered overhead.
Required A. Where would you expect to see advertising expense included on an income statement? Does the inclusion of advertising in the overhead amount seem reasonable to you? Why might Fancy Glassware want to include advertising expense in manufacturing overhead? B. Your friend explains to you that the “management salary allocation” is the result of a corporate strategy of requiring that each part of the business bear some of the costs associated with management’s functions. You learn that none of the salary allocation relates to management members who are associated with production operations. Is the inclusion of the salary allocation legitimate? C. What is the financial statement impact of including advertising expenses and an allocation for management’s salaries in manufacturing overhead?
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