Question

Read the scenario below, and address the subsequent requirements. Emma is the plant manager of an electronics company. Plant managers are paid a salary and get an additional bonus equal to 5% of their base salary if their division meets or exceeds target profits for the year. The bonus is determined after the company's annual financial report has been prepared and issued to shareholders. Emma's division uses a process costing system where the estimate of the percentage completion of ending work in process inventories affects the unit costs of finished goods and therefore the cost of goods sold. (All units completed and transferred out of the final processing department were sold.) Emma just received preliminary profit figures for her division which show it is within $200,000 of making the year's target profits. To earn her bonus, Emma simply needs to convince James, her lead production supervisor, to increase the estimate of the percentage complete of ending work in process inventory. James has already submitted the percentage completion figures to corporate headquarters. Required: In your post, address the following questions: 1. What are the ethical issues in this process costing environment? What are the risks? 2. Do you think James should go along with Emma's request to alter estimates of the percentage completion? Why or why not?

Answer 1

(1) The ethical issue that could be addressed here is of misleading the organization by showing wrong estimates of percentage of completion even if the report is submitted but the act won’t be honest plus future process of production might get wrong.

(2) Since, the estimates of percentage of completion of production are used to find equivalent units of production which is further used to find cost of goods sold, so if the costs would be underestimated by projecting most part of the product is completed can cause overstated net income in financial states. James should not along Emma’s request because even if it is due to peer pressure, but it’ll ultimately effect all the employees in coming periods.