Would you have the textbook answer for this please? Thanks! Management Accountin
ID: 2461864 • Letter: W
Question
Would you have the textbook answer for this please? Thanks!
Management Accounting, Garrison, Case 4-20 Ethics and the Manager; Understanding the Impact of Percentage Completion on Profit-Weighted-Average Method
Gary Stevens and Mary James are production managers in the Consumer 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 El 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 its target profits for the year. The bonus is determined in March after the company's annual report has been prepared and issued to stockholders.
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 last year and we are within $200,000 of making the year's target profits. All we have to do is pull a few strings, and we'll be over the top!
Mary: What do you mean?
Gary: Well, one thing that would be easy to change is your estimate of the percentage completion of your ending work in process 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 sent 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 the rest of us sure could use it.
The final processing department in Mary's production facility began the year with no work in process inventories. During the year, 210,000 units were transferred in from the prior processing department and 200,000 units were completed and sold. Costs transferred in from the prior department totaled $39,375,000. No materials are added in the 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 ending inventory in the final processing department were 30% complete with respect to the conversion costs of the final processing department. If this estimate of the percentage completion is used, what would be the Cost of Goods Sold for the year?
2.Does Gary Stevens want the estimated percentage completion to be increased or 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 the percentage completion? Why or why not?
Explanation / Answer
Equivalent units conversion cost = 200,000 + 10,000x30%
= 203,000
Conversion cost per equivalent units = 20,807,500/203,000
= 102.50 per unit
Material cost per unit = 39,375,000/210,000
=187.50
Total cost per equivalent unit = 187.50 +102.50
= 290 per unit
Cost of goods sold = no. of units sold x cost per unit
= 200,000 x290
= 58,000,000
2) They want to increase the estimated percentage completion. Increasing the estimated percentage completion will increase the number of equivalent units with respect to conversion cost and hence, conversion cost per equivalent unit will reduce. This will lead to decrease in per unit cost of goods sold. Reduction in unit cost of goods sold will increase net profit. Increase net profit is their ultimate aim.
3) For increasing net income by 200,000 we have to decrease the total conversion cost per unit by 200,000. As per 30% completion approach, per unit conversion cost is 102.50. 200,000 units are being sold, therefore we need to decrease conversion cost $1 per unit.
New conversion cost per unit = 102.50 -1 =101.50
Conversion cost per unit = Total conversion cost/no. of equivalent units
101.50 = 20,807,500/ no. of equivalent units
no. of equivalent units = 20,807,500/101.50
= 205,000 units
No. of equivalent units = competed units + uncompleted units x % completion
205,000 = 200,000 +10,000 x % completion
% completion = 5000/10,000
% completion = 50%
4) No, they should not go with the alteration in estimates for percentage completion. They are doing this just to earn their incentives not for the fairness of accounting records. This is unethical.
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