total of $20,807,500 of conversion cost was incurred in the final processing dep
ID: 2539375 • Letter: T
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total of $20,807,500 of conversion cost was incurred in the final processing department during the year Name Due Wednesday February 21t in class 100 points CASE 4-20 Ethics and the Manager, Understanding the Impact of Percentage Completion on Profit-Weighted-Average Method LO4 2, LO4-3, LO4-4 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, lowa, 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 Required 1. Tom Winthrop estimated that the units in ending work in process 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? (Note besides the fact that manipulating numbers to meet an earnings goal is wrong tell me A) how it would negatively impact shareholders' B) which financial statements would be impacted and how would it impact those statements C) what would be the potential ramifications if the auditors discovered the estimate manipulation D) how might the auditors discover the estimate manipulation and E) and what might happen if other employees found out about the estimate manipulation? 1. GactHa's it going, Mary? 2. MacEine, Gary. How's it going with you? 3. Garx: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! 4. MackWhat do you mean? 5. GacWell, one thing that would be easy to change is your estimate of 5. If you were Mary, name three options you would have in dealing with this situation? the percentage completion of your ending work in process inventories. 6. If you are Mary what is your opinion of Gary after this conversation? 6. Macl 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 7. Would you likely/not likely support a promotion for Gary within the 8. Are there any legal consequences to Mary if she changes the 9, what percentage chance (0-100%) do you give yourself that you will company? Why or Why not? completion percentage? be faced with an ethical dilemma in your career within the first 10 year eadquarters.Page 181 7. GacYau 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. post-graduation? The final processing department in Mary's production facility began the year with no work in process inventory. 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. AExplanation / Answer
1.
Total cost of goods sold = 3750000+20500000 = $58,000,000
* Please note that there is no beginning work in progress units
2. Gary Stevens would want the estimated percentage conpletion to be increased as this will increase the equivalent units of production. This will, in turn, reduce the cost per equivalent unit.
3. Net operating income = Sales - cost of goods sold
So, to increase the net operating income by $200,000, the cost of goods sold needs to be reduced by $200,000. the new cost of goods sold will be = $58,000,000 - 200,000 = $57,800,000
Let the percent of completeion be x%
Unit cost = 187.5 + 20807500 / (200000+10000x) ..................equation 1
Cost of goods sold = 200000*Unit cost
57800000 = 200000*Unit cost
Unit cost = 57800000/200000 = $289
Putting unit cost value in equation 1, we get
289 = 187.50 + 20807500/(200000+10000x)
x = 50%
So, changing the completion percentage to 50% will reduce the cost of goods sold and increase the net operatng income by $200,000.
4. What Gary Stevens is suggesting, it is a clear case of manipulating the financial statements for the purpose of meeting own goals rather than that of organisational goals. This is clearly an unethical practice to go ahead with the suggested manipulations of accounts.
It needs to be considered if the statement given by Gary that "all the other managers are doing as much as they can to pull this bonus out of the hat" is true or just a way to pursuade Mary.
It might be the case that other managers are also told the same thing so that Gary is able to meet the personal objectives and may be in the same dilemma if the alteration to estimates should be done or not.
Disagreeing to the proposal seems clear but there might be a lot of peer pressure on Mary that will also be considered.
Also, the numbers have been provided to headquarters and any change in the numbers furthur can raise a few eyebrows and lead to job insecurity as well. Tom Winthrop should also agree to such manipulations.
Particulars Transferred In Conversion Units completed and sold 200,000 200,000 Ending Work in progress 10000*100% 10,000 10000*30% complete 3,000 Equivalent units of production 210,000 203,000 Cost added during the year 39,375,000 20,807,500 Cost per equivalent unit 187.50 102.50 Cost of goods sold 37,500,000 20,500,000Related Questions
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