Question

Read the following scenario and then thoughtfully discuss the questions. Maredo Leather Company manufactures top quality leather used by Roe and Adler, LLC in their manufacture of airplane seat covers. The production manager at Maredo has been under pressure from the company president to reduce the cost of conversion. In spite of several attempts to reduce conversion costs, they have remained more or less constant. Now the manager is faced with an upcoming meeting with the company president, where he will have to explain his failure to reduce conversion costs. The manager goes to the company controller with the following request. He explains that he is under pressure to reduce cost in the production process, but there is no way to reduce material costs. He explains that if he can just show a little progress in his meeting with the president then he can buy some time to try some other cost-saving measures. He asks the controller to raise the estimate of the percentage of completion of the ending inventory for the month to 60 percent. This will increase the number of equivalent units and the unit conversion cost will be a little lower. Use the following to answer the questions below: October 1 Work-in-Process 400 units Conversion 25% complete Inventory costs as of Oct 1: Leather Dye Conversion costs Total $990 260 300 $1,550 During October 7,600 leather fabric pieces were placed into production. A total of 7,000 leather fabric pieces were completed. The work-in-process inventory on October 31 consisted of 1,000 leather fabric pieces with were 50 percent complete as to conversion. The costs charged to production during October

Answer 1

1.

Using the actual 50% completion ratio:

Cost production report as below:

Units to account for		Materials		Conversion
		%	Units	%	Units
Beginning WIP	400
Started in process	7,600
Total units to account for	8,000
Units accounted for:
Started and completed	7000	100%	7000	100%	7000
Ending WIP	1000	100%	1000	50%	500
Total units accounted for	8,000		8000		7500

Equivalent cost per unit
	Materials	Conversion
Costs	26490	21000
Equivalent units	8000	7500
Equivalent cost per unit	3.31125	2.80

Using the conversion costs of 60% as suggested by the production manager:

Units to account for		Materials		Conversion
		%	Units	%	Units
Beginning WIP	400
Started in process	7,600
Total units to account for	8,000
Units accounted for:
Started and completed	7000	100%	7000	100%	7000
Ending WIP	1000	100%	1000	60%	600
Total units accounted for	8,000		8000		7600

Equivalent cost per unit
	Materials	Conversion
Costs	26490	21000
Equivalent units	8000	7600
Equivalent cost per unit	3.31125	2.76

The equivalent conversion unit cost is lowered by $ 0.04 if the conversion % is higher.

2. The controller should suggest that increasing the conversion cost % will not make a major difference to the cost per unit since the unit cost is only lowered by $0.04. Also, he must explain that showing higher inventory in the books will not be in the company's favorable terms in the foreseeable future. The same will come light either during audit or management review which will not be certainly appreciated.

3. Increasing the percentage of completion to have a lower unit cost of production is definitely unethical move by the production manager. It will only put his job at risk in the future since the same will lead to inaccurate profits and variances in the future management analysis. Also showing higher inventory will increase the net profit which may not win investors confidence and trust. The manager must adhere to integrity standard for managerial accountants which states that managers must mitigate actual conflict of interest and abstain from conducting any activity that would prejudice carrying out duties ethically. The manager under pressure must take decisions for his personal gain.