Rick Pines and Joe Lopez are the plant managers for High Mountain Lumber’s parti
ID: 2415237 • Letter: R
Question
Rick Pines and Joe Lopez are the plant managers for High Mountain Lumber’s particle board division. High Mountain Lumber has adopted a just-in-time management philosophy. Each plant combines wood chips with chemical adhesives to produce particle board to order, and all product is sold as soon as it is completed. Laura Green is High Mountain Lumber’s regional controller. All of High Mountain Lumber’s plants and divisions send Green their production and cost information. While reviewing the numbers of the two particle board plants, she is surprised to find that both plants estimate their ending Work-in-Process Inventories at 75% complete, which is higher than usual. Green calls Lopez, whom she has known for some time. He admits that to ensure their division would meet its profit goal and that both he and Pines would make their bonus (which is based on division profit), they agreed to inflate the percentage completion.
Lopez explains, “Determining the percent complete always requires judgment. Whatever the percent complete, we’ll finish the Work-in-Process Inventory first thing next year.”
Address the following: What is the ethical issue? What are the options? What are the potential consequences? What should Green do?
Explanation / Answer
In this case ,Rick Pines and Joe Lopez who are the plant managers are inflating the percentage completion of ending Work-in-Process Inventory which will increase profit in books of accounts which leads to increase their bonus as they would get more bonus on profit.
On the other side, it would lead to the misstatement of the financial statement and it will represent the false picture of Inventory and profit or loss as well.
Moreover on finding by this by Green,
Lopez explains, “Determining the percent complete always requires judgment. Whatever the percent complete, we’ll finish the Work-in-Process Inventory first thing next year.”
They are using the wrong valuation in the name of judgment which is against integrity. it would result in the misstatement of next year financial as well.In this case,Green should go to the concerned authority and get work in progress revalued and get rectified Financial statements and should take appropriate action against Rick Pines and Joe Lopez as well.
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