ACCT
505 Week 2 DQ2 CASE
4-19
Research
and Application (graded)
Go to
page 166 and read Case 4-19, Ethics and the Manager: Understanding the Impact
of Percentage Completion on Profit. Let’s address the questions, provide
reasons for our answers, share relevant personal experiences, and provide
value-added comments, articles, and related websites. Let’s have a lot of
interaction.
CASE 4-19 Ethics and the Manager;
Understanding the Impact of Percentage Completion on Profit [LO2, LO3, LO4]
Thad Kostowski and Carol Lee are
production managers in the Appliances Division of Mesger Corporation, which has
several dozen plants scattered in locations throughout the world. Carol manages
the plant located in Kansas City, Missouri, while Thad manages the plant in
Roseville, Oregon. Production managers are paid a salary and get an additional
bonus equal to 10% of their base salary if the entire division meets or exceeds
its target profits for the year. The bonus is determined in March after the
company's annual report has been prepared and issued to stockholders.
Late in February, Carol received
a phone call from Thad that went like this:
Thad: How's it going, Carol?
Carol: Fine, Thad. How's it going
with you?
Thad: Great! I just got the
preliminary profit figures for the division for last year and we are within
$62,500 of making the year's target profits. All we have to do is to pull a few
strings, and we'll be over the top!
Carol: What do you mean?
Thad: Well, one thing that would
be easy to change is your estimate of the percentage completion of your ending
work in process inventories.
Carol: I don't know if I should
do that, Thad. Those percentage completion numbers are supplied by Jean
Jackson, my lead supervisor. I have always trusted her to provide us with good
estimates. Besides, I have already sent the percentage completion figures to
the corporate headquarters.
Thad: You can always tell them
there was a mistake. Think about it, Carol. All of us managers are doing as
much as we can to pull this bonus out of the hat. You may not want the bonus
check, but the rest of us sure could use it.
The final processing department
in Carol's production facility began the year with no work in process
inventories. During the year, 270,000 units were transferred in from the prior
processing department and 250,000 units were completed and sold. Costs transferred
in from the prior department totaled $49,221,000. No materials are added in the
final processing department. A total of $16,320,000 of conversion cost was
incurred in the final processing department during the year.
Required:
1. Jean Jackson estimated that
the units in ending inventory in the final processing department were 25%
complete with respect to the conversion costs of the final processing
department. If this estimate of the percentage completion is used, what would
be the cost of goods sold for the year?
2. Does Thad Kostowski want the
estimated percentage completion to be increased or decreased? Explain why.
3. What percentage completion
figure would result in increasing the reported net operating income by $62,500
over the net operating income that would be reported if the 25% figure were
used?
4. Do you think Carol Lee should
go along with the request to alter estimates of the percentage completion? Why
or why not?
Page to the specified printed
page number
TUTORIAL PREVIEW
Thad Kostowski wants the
estimated percentage figures to be increased for ending work in process. This
increase in percentage completion of work in process inventories will affect
the unit costs of finished................................
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