ACCT505 – Managerial Accounting
Case Study 2
Chapter 4 – Process Costing
Team Assignment (2-3 Team members recommended)
CASE 4–20 Ethics and the Manager,
Understanding the Impact of Percentage Completion on Profit—Weighted-Average
Method [Course Objective B] Gary Stevens and Mary
James are production managers in the Consumer Electronics Division of General
Electronics Company, which has several dozen plants scattered in locations
throughout the world. Mary manages the plant located in Des Moines, Iowa, while
Gary manages the plant in El Segundo, California. Production managers are paid
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 is determined
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 do is 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
TomWinthrop, my lead supervisor, who I have always trusted to provide us 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 not want 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
in from 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 are added 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 final processing department. If this
estimate of the percentage completion is used, what would be the Cost of Goods
Sold for the year? (Note: Since all units completed were sold, the cost of
goods transferred out = Cost of Goods Sold.)
2. Gary
is recommending that the completion percentage by adjusted by 10 percentage
points in order to assist the team in making their bonus.
a. Calculate the cost of goods sold if the
ending inventory is 20% complete in regard to conversion costs. Would net income increase or decrease if
this option was chosen over the 30% completion percentage? How much is the
increase?
b. Calculate the cost of goods sold if the
ending inventory is 40% complete in regard to conversion costs. Would net income increase or decrease if
this option was chosen over the 30% completion percentage? How much is the
increase?
c. Based on your
calculations, which percentage is Gary suggesting that Mary use for her ending
inventory calculations. Recall that Gary wants to see a higher net
income figure.
3. Do
you think Mary James should go along with the request to alter estimates
of the percentage completion? Why or why not? Support your response by
consulting the IMA Standards of Ethical Practice.
Deliverables:
1.
Submit an Excel spreadsheet that documents the calculations made for steps 1
and 2 above. All items should be clearly labeled, and appropriate formulas
should be used to perform your calculations.
2.
For step 3, submit a narrated PowerPoint (orVoiceThread)
that highlights your discussion of the operational and ethical issues that
Mary is facing as a result of the request to change the percent complete on
ending inventory. Be sure to make a recommendation in regard to making this
decision. A suggested length guideline is two slides per group member.
3.
Only one group member needs
toupload the PowerPoint and Excel filefor the case study on behalf of the group
to the Week 3 assignment link in your course shell. If there were issues with
non-participating group member, all group members should submit a peer
evaluation directly to the instructor via e-mail.
4.
NOTE: as a team project, a team
collaboration tool (such as Cisco Spark) should be used for the students to
collaborate on the project!
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