Question

Scenario 2:

Raymond Tortin is the corporate controller of Thompson Paper Co., which operates 10 paper-making plants in Georgia. Each plant processes trees into pulp, the key raw material needed to produce paper. The company uses a weighted-average process costing system. Given the competitive landscape for pricing, Thompson’s managers pay close attention to costs. At the end of every quarter, each plant manager submits a production report and a production-cost report prepared by each plant’s controller to Tortin. The production report includes the plant manager’s estimate of the percentage of completion of the ending work in process as to direct materials and conversion costs, as well as the level of processed pulp inventory. Tortin uses these estimates to compute the cost per equivalent unit of work done for direct materials and conversion for the quarter. Plants are ranked from 1 to 10, and the three plants with the lowest cost per equivalent unit for direct materials and conversion costs are each given a bonus and recognized in the company newsletter. Tortin has been pleased with the success of his benchmarking program. However, he has recently received anonymous e-mails that two plant managers have been manipulating their quarterly estimates of percentage of completion in an attempt to obtain the bonus.

Scenario 2 required questions:

1. How might plant managers manipulate their quarterly estimates of percentage of completion of ending WIP inventory? Why might it be to their advantage to do so? What are their incentives to misreport the percentage of completion of ending WIP inventory for each of direct materials and conversion? (Hint: think about the cost per equivalent unit calculation and how the estimate of percentage complete of ending WIP inventory is connected to that calculation).

2. Tortin’s first reaction is to contact each plant controller and discuss the problem raised by the anonymous communications. Is that a good idea? Why or why not? \

Answer 1

Refer the below images for the above mentioned questions in a detailed way of explanation.

Requirement : 1. The reported direct materials plant manager of ending work monthly cost per equivalent unit of either con conversion costs is lower when the overestimates the percentage of completion in process the denominator and thus, decreases 2. The the overestimates increases cost per Rapuivalent Unit cost per 3. The plant manager has two options to report lower equivalent whit nombers - To get a bonus and - To be recognized in the company newsletter 4 By manager ranked reporting a increases plants for lower the the cost per likelihood of benchmarkling equivalent unit, being in the comparisons. the top plant three Requirement : 1 Although the plant controller has responsibility the accounting reports for the plant, in most plant controller reports directly to the plant for preparing cases, the manager 2. If this reporting conflict of interest relationship Situation exists for Tortin may the plant create a Controller . 3. only if the Controler , and Tortin show Simultaneously plant controller reports directly to the corporate indirectly to the plant manager, Should the letters to the plant controller will showing them to the plant manager.

4. Tortin Shows the letters to the line executive to whom the plant manageal report ina hard-line way (corporate manager of manufacturing). This approach is appropriate if the letters allege it is the plant managers who are manipulating the percentage of completion estimates. S. Tortin herselt shows This approach songs the (or reaching negatively report as a tine - mode depend here on how need not have much details. the letters to the plant managers. danger of the plant managers ignoring to someone to whom they do not questioning this behaviour. Much will tortin saises the issue on signed letters credibility unless they contain spectic