Question

Rick Pines and Joe Lopez are the plant managers for High Mountain Lumber's particle board division. High Mountain Lumber has adopted a just-in-time management philosophy. Each plant combines wood chips with chemical adhesives to produce particle board to order, and all product is sold as soon as it is completed. Laura Green is High Mountain Lumber's regional controller. All of High Mountain Lumber's plants and divisions send Green their production and cost information. While reviewing the numbers of the two particle board plants, she is surprised to find that both plants estimate their ending Work-in-Process Inventories at 75% complete, which is higher than usual. Green calls Lopez whom she has known for some time. He admits that to ensure their division would meet its profit goal and that both he and Pines would make their bonus (which is based on division profit), they agreed to inflate the percentage completion. Lopez explains, "Determining the percent complete always requires judgment. Whatever the percent complete, we'll finish the Work-in-Process Inventory first thing next year."

Requirements:

1. How would inflating the percentage completion of ending Work-in-Process Inventory help Pines and Lopez get their bonus?
2. The particle board division is the largest of High Mountain Lumber's divisions. If Green does not correct the percentage completion of this year's ending Work-in-Process Inventory, how will the misstatement affect High Mountain Lumber's financial statements.
3. Evaluate Lopez's justification, including the effect, if any, on next year's financial statements.
4. Address the following: What is the ethical issue? What are the options? What are the potential consequences? What should Green do?

Answer 1

1. Inflating the percentage completion of ending work-in-progress would lead to overvaluation of ending work in progress. Such overvalued ending work in progress would be credited to the Profit and Loss Account thereby increasing the amount credited to the said account. so increase in the amount credited to the Profit and Loss Account which will  increase in the profits. beacuse of that  Pines and Lopez bonuses are based on profits, the increased profits would lead to higher profits for Pines and Lopez. so based on that Inflating the percentage completion of ending work-in-process inventory would help Pines and Lopez get their bonuses.

2. If Green does not correct the percentage completion of this year’s ending work-in-process inventory, this will lead to disclosure of enhanced profits as discussed above. Further, due to increase in the percentage completion the ending work in progress would be reflected in the balance sheets at higher value. This will lead to overstatement of assets in the balance sheet.

Hence, if Green does not correct the percentage completion of this year’s ending work-in-process inventory, this will lead to disclosure of enhanced profits and overvalued ending work in progress.

In addition to that justification of L is not regarding of work in progreess of WIP inventory in next year is not solution for inflating the clsoing WIP.

beacuse the products cost inncured next year for last years ending WIP inventory charged to cost of goods sold in next year lead higher cost of goods sold and lower gross profit in next year.

the misstatement of wip is not justfiable as it not affect current finanacials it will affect the next financial years as well.

4.the ethical issue is inflating the wip will lead to incoorect disclosure and misleading of financial postion of company

instead of increase of Wip the managers need to concerate on to reduce the product cost or increase profotability to meet the targets of company.

the regional controller immediately ask to rectify the correct the percentage of completion of WIP so that financial statement are not missleaded.

he should also advice the plant manager the way of increase profitability or reduction of costs and not to maniplate to meet to targets.