Group 2
Members:
BELLAS, Kriztel Jenn Bete
BUCOY, Adrian Mirontos
BULASA, Geri Mae Limocon
CATAPANG, Mhelane Platino
CUBIO, Kate Jesamae Nistal
DALAGAN, Alfred Bayocot
DELA PEÑA, John Lloyd Arac
Problem 51
A. How does increasing production, relative to the planned level of production, decrease Cost
of Goods Sold?
 Increasing production, relative to sales or relative to prior plans, has the effect of
moving fixed manufacturing overhead from the income statement to the balance
sheet. By substantially producing more units than required to meet sales demand, a
significant portion of the Fixed Manufacturing Overhead Cost incurred can be put
into inventory.Therefore, the result would be a lower Cost of Goods Sold. Moreso,
Fixed Manufacturing Overhead Cost is part in computing Cost of Goods Sold.
Thus, this fixed amount shall have significant effect in the changes of volume of
production in a certain manufacturing company. Therefore, any increase in
production, would result to a lower Cost of Goods Sold. Provided further, that the
lower Cost of Goods Sold is, the higher Net Profit would make.
B. What other accounts are likely to be affected by a strategy of increasing production to
increase income?
 The accounts that are likely to be affected by this strategy are the finished goods,
also those goods that are still in process, and the inventories. These said accounts
would increase because the increase in production is not matched with the increase
of sales. In other words, in order to increase your income, you also have to increase
your production. Thus, these two accounts should match or balance each other.
Furthermore, the manufacturing costs would also rise as you increase your
production. The increase in the costs would then be realized in the form of higher
accounts payable, lower cash balances, or higher loan balances that you incurred
during the production. The increase of production will also have an effect on the
manufacturing overhead cost particularly on the total variable cost account and has
no effect on the fixed manufacturing overhead assuming that the firm operates
within the relevant range.The relevant range is the normal amount of activity in
which the fixed costs will not change.The increase of production to increase the
income in effect will increase the total variable cost account. Assuming in the
problem, the firm's strategy to increase production above planned levels is still
within the relevant range.This will increase its total variable cost incurred but the
total amount of fixed manufacturing overhead incurred would not be affected by
the decision to increase production
C. Is the CFO’s plan ethical? Explain.
 The strategy of the CFO is unethical. This technique will result to manipulation of
assets. We all know that the $500 million instead of putting it in COGS, it’ll be put
on the Finished Goods Inventory and finished goods inventory is an asset which
could result to future income. It would show a higher asset value than the company
actually has. They are trying to manipulate the assets in order to reduce COGS
which can only distort the value of their reported profit earned by the firm and
they’re practically lying about it. It is unethical because the differences between
sales and production volume results to different net income. Hence, if the CFO will
transfer COGS to Finished Goods it would manipulate the sales volume resulting
to higher profit and by tampering sales it can be a potential ethical issue. Also, by
reporting a higher profit, the CFO would likely personally benefit compensation
and perhaps, stock options. In conclusion, what the CFO did was unethical, because
she was looking for loopholes and manipulating numbers to present whatever
stories she wants. On the contrary, she should have full, fair, accurate, timely, and
understandable disclosure in the periodic reports and having the “true” profitability
of the specific product or specific sub unit.
D. If you were a stockholder of MultiTech and carefully examined the 2010 financial
statements, how might you detect the result of the CFO’s strategy?
 The results of these changes can be detected through analyzing the financial
statements because increasing the production also means an increase in the incurred
costs for these products. Thus, you will clearly see in the statement of financial
position the balances of these inventory accounts. Aside from that, this could also
result to more payables or lesser cash for the company because of the additional
costs incurred. All in all, being mindful and alert of the balances of the inventories
would be the most effective way to detect the result.