Question

Your company has just adopted a just-in-time philosophy, allowing it to combine all parts of an order and it is sold as soon as it is completed. You notice two of the plants estimate their ending Work-in-Process inventories at 80%. This allows the plant managers to meet their profit goals and receive a bonus. The managers feel calculating the percent complete takes judgement and they will finish the Work-in-Process inventory first thing next year.

Evaluate the manager’s reasoning and explain the effects this could have on the current and future year’s financial statements. Include any ethical issues created by the managers. Identify the options your company has, and what consequences does this create for the company.

Answer 1

Let us understand the philosophy of just in time, it means that the orders are started only after the order is taken and all the procurements are made only after the order is taken. There will not be any work in progress and storage costs for the manufacturers adopting just in time philosophy. Which is a great cost cut for them.

Here in the given situation the company os following just in time philosophy and the production managers are holding work in progress in order to receive bonuses.

This is against the company policy and is also unethical because to receive bonuses one cannot violate the company policy. This also will have a impact in the company financials as it will lead to storage costs and also thinking logically production is done 80% but the product is still in company premises means that sale is not yet recognised.

These are consequences that might result of the above situation.