Nature’s Own Garden manufactures organic fruit preserves sold
primarily through health food stores and on the Web. The company closes
for two weeks each December to enable employees to spend time with their
families over the holiday season. Nature’s Own Garden’s manufacturing
overhead is mostly straight-line depreciation on its plant and
air-conditioning costs for keeping the berries cool during the summer
months. The company uses direct labor hours as the manufacturing
overhead allocation base. President Cynthia Ortega has just approved new
accounting software and is telling controller Jack Strong about her
decision. “I think this new software will be great,” Ortega says. “It
will save you time in preparing all those reports.” “Yes, and having so
much more information just a click away will help us make better
decisions and help control costs,” replies Strong. “We need to consider
how we can use the new system to improve our business practices.” “And I
know just where to start,” says Ortega. “You complain each year about
having to predict the weather months in advance for estimating
air-conditioning costs to include in the calculation of the
predetermined overhead allocation rate, when professional meteorologists
can’t even get tomorrow’s forecast right! I think we should calculate
the predetermined overhead allocation rate on a monthly basis.”
Controller Strong is not so sure this is a good idea.
1. What are the advantages and disadvantages of Ortega’s proposal?
2. Should Nature’s Own Garden compute its predetermined overhead allocation rate on an annual basis or monthly basis? Explain.