External financial reporting.
You are a CPA and serve as an independent director on a manufacturing company’s audit
committee. The board of directors assigned you to examine the company’s managerial
accounting system. You found several issues listed below:
1. The company classified an executive’s salary as manufacturing costs. The executive is in
charge of the company’s production.
2. Based on the company’s budgeted production and actual sales and purchases, the
company had substantially overproduced the products during the period.
3. The costs of direct materials increased in the period. The company switched to FIFO
from the weighted average cost method in the period.
4. The company overestimated the percentage of completion of ending work in process
inventory with respect to conversion costs.
5. The company substantially cut advertising expenses in the period.
6. The company has different products. The sales revenues are mainly attributable to the
sale of high-volume products. The company switched to ABC from the traditional
approach in applying manufacturing overhead in the period.
Required:
Discuss the implications of these issues for the company’s external financial reporting.