Gray Stevens and Mary James are production managers in the customer electronics
ID: 2423017 • Letter: G
Question
Gray Stevens and Mary James are production managers in the customer electronics division of General
Electronics Company, which has several dozen plants scattered in locations throughout the world. Mary
manages the plant located in Des Moines, Iowa, while Gary manages the plant in EI Segundo, California.
Production managers are paid a salary and get an additional bonus equal to 5% of their base salary if the
entire division meets or exceeds the target profit for the year. The bonus is determined in March after the
company’s annual report has been prepared and issued to shareholders.
Shortly after the beginning of the New Year, Mary received a phone call from Gary that went like this:
Gary: How’s it going, Mary?
Mary: Fine, Gary. How’s it going with you?
Gary: Great! I just got the preliminary profit figures for the division for the last year and we are with in
$200,000 of making the year’s target profits. All we have to do is to pull a few strings, and we’ll
be over the top!
Mary: What do you mean?
Gary: Well. One thing that would easy to change is your estimate of the percentage completion of your
ending work in progress inventories.
Mary: I don’t know if I can do that, Gary. Those percentage completion figures are supplied by Tom
Winthrop, my lead supervisor, who I have always trusted to provide us with good estimates.
Besides, I have already sends the percentage completion figures to corporate headquarters.
Gary: You can always tell them there was a mistake. Think about it, Mary. All of us managers are doing
as much as we can to pull this bonus out of the hat. You may not want the bonus check, but rest
of us sure could use it.
The final processing department in Mary’s production facility began the year with no work in progress
inventories. During the year, 210,000 units were transferred in from the prior processing department and
200,000 units were completed and sold. Cost transferred in from the prior department totaled
$39,375,000. No materials are added in final processing department. A total of $20,807,500 of conversion
cost was incurred in the final processing department during the year.
Required:
1. Tom Winthrop estimated that the units in the ending inventory in the final processing department
were 30% complete with respect to conversion costs of final processing department. If this
estimate of percentage completion is used, what would be the cost of goods sold for the year?
2. Does Gary Stevens want the estimated percentage to be increased of decreased? Explain why?
3. What percentage completion would result in increasing reported net operating income by
$200,000 over the net operating income that would be reported if the 30% figure were used?
4. Do you think Mary James should go along with the request to alter estimates of percentage
completion?
5. If you are the CEO of the company, what do you think when you know this issue? Any action to
take?
Explanation / Answer
1. Cost of goods sold during the year
210,000*30%=63000 units
63,000*39,375,000/210,000
=11,812,500
2. Gary Stevens wanted the estimated percentage of the closing work in progress inventories to be decreased so that the percentage of completed inventories will be more.If the completed units is high then there will be hike in sales figure and they will reach the targeted profits for the year to get the bonus.
4. Integrity In The Workplace Integrity directly relates to the workplace and keeping one’s word. It is important to have integrity in the workplace because without it, there would be little reason for an employer to keep you. Employment is given with the trust that the person being hired will keep their end of the bargain by completing the necessary work they’ve been hired for. An employee that lacks integrity is worst than one that lacks skills. Skills can beaught at almost any point in one’s life. Integrity on the other hand, cannot be taught as easily. The importance of values and adherence to those values are usually learned at an early stage in life from our parents and closest loved ones. It is not easy to teach a person that lacks integrity to hold the same deep appreciation and concern for principles as someone who already posses these traits. It is important to have integrity in thework place for many reasons. It demonstrates reliability and responsible ness. By doing shabby work or simply not completing the work on time or at all, you demonstrate irresponsibleness, lack of interest and a breach in agreement. If one is being paid to complete a task, they are relying on you to keep your end of the deal. It is very difficult to trust a person that does not always keep their word. This makes it a difficult situation forboth the employer and the employee. An employee that cannot keep their word by performing the desired task satisfactorily and on time causes the company to lose money. This can often lead to frequent referrals and even termination. It is of no use to any company to hire a person for their skills if that person cannot be trusted.
So,Mary James should not go along with the request to alter the estimates of percentage completion as it is against the workplace ethics.
5. As a CEO,I will take stringent actions against the employee who is involved in such fraud.I will also encourage employees to do work ethically.Teaching the employees about the workplace ethics will help eliminate such frauds.
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