Question

Gary Stevens and Mary James are production managers in the Consumer Electronics Division of General Electronics Company, which has several dozen plants scattered inlocations throughout the world. Mary manages the plant located in Des Moines, Iowa, while Gary manages the plant in El Segundo, California. Production managers arepaid a salary and get an additional bonus equal to 5% of their base salary if the entire division meets or exceeds its target profits for the year. The bonus isdetermined in March after the company's annual report has been prepared and issued to stockholders.

Shortly after the beginning of the new year, Mary received a phone call from Gary that went like this:

Gary: How's it going, Mary

Mary: Fine, Gary. How's it going with you?

Gary: Great! I just got the preliminary profit figures for the division for last year and we are within $200,000 of making the year's target profits. All we have to dois pull a few strings, and we'll be over the top!

Mary: What do you mean?

Gary: Well, one thing that would be easy to change is your estimate of the percentage completion of your ending work in process inventories.

Mary: I don't know if I can do that, Gary. Those percentage completion figures are supplied by Tom Winthrop, my lead supervisor, who I have always trusted to provideus with good estimates. Besides, I have already sent the percentage completion figures to corporate headquarters.

Gary: You can always tell them there was a mistake. Think about it, Mary. All of us managers are doing as much as we can to pull this bonus out of the hat. You may notwant the bonus check, but the rest of us sure could use it.

The final processing department in Mary's production facility began the year with no work in process inventories. During the year, 210,000 units were transferred infrom the prior processing department and 200,000 units were completed and sold. Costs transferred in from the prior department totaled $39,375,000. No materials areadded in the final processing department. A total of $20,807,500 of conversion cost was incurred in the final processing department during the year.

Required:


1.Tom Winthrop estimated that the units in ending inventory in the final processing department were 30% complete with respect to the conversion costs of the finalprocessing department. If this estimate of the percentage completion is used, what would be the Cost of Goods Sold for the year?

2.Does Gary Stevens want the estimated percentage completion to be increased or decreased? Explain why.

3.What percentage completion would result in increasing reported net operating income by $200,000 over the net operating income that would be reported if the 30%figure were used?

4.Do you think Mary James should go along with the request to alter estimates of the percentage completion? Why or why not?

Answer 1

Part 1

The cost of goods sold is $58,000,000.

Part 2

G Stevens want to increase the percentage completion of ending inventory.

Part 3

50% completion of uncompleted units would result in an increase in the net operating income by $200,000.

Part 4

M James should not alter the estimates of the percentage completion.

Answer 2

Answer:1 The conversion cost is the cost of 100% complete work on the 200,000 units sold, plus 30% complete work on 10,000 units in the inventory. A 30% complete work on 10,000 units is equivalent (for calculation purposes) to 100% complete work on 3,000 units.

( The conversion cost on the 200,000 units that were sold = 20,807,500 *200,000/203,000 = $20,500,000

( Cost incurred from the prior department = $39,375,000 ( sold units/total units) = $39,375,000 * 200,000/210,000 = $37,500,000)

Cost of goods sold for the year = $20,500,000 + $37,500,000 = $58000,000

Answer:2 Gary Stevens wants the estimated percentage completion on the ending inventory to be increased over 30% so that the cost of the goods sold will appear to be lower that reality and will be mistaken as a cost of completion. This will consequently bump up the profit estimates to the target profits, as Gary Stevens wants.

Answer:3 The 30% complete work on 10,000 units in the inventory cost $20,807,500 - $20,500,000 = $307,500. So each 1% increase in completion will cost 1/30(307500)= $10250. So to get an increase in the reported net operating income by $200000 over the net operating income that would be reported in the 30% figure, the percent completion would have to be 30% + 4.9% = 29.9 %

Answer:4 No Mary James should not go along with the request to alter estimates of the percentage completion because it is an unethical business practice. Not only is it unethical, it's illegal to bad financial documents for any reason; this action could land her jobless or even worse. ...in jail for fraud.

Answer:5