ABCs production manager, John, has been under pressure from the companys president to reduce the conversion costs. In spite of several attempts to reduce conversion costs, they remained more or less constant. Now John is faced with an upcoming meeting with the company president, at which he has to explain why he has failed to reduce conversion costs. Johns annual bonus is based on achieving cost targets approved by the President. ABC uses a participative budgeting process. This years cost target is 1% lower than $5.30 for mens leather belts. John has not achieved this target for the prior 10 months.

John is under pressure to reduce costs in the production process. There is no way to reduce material cost, so he has got to get the conversion costs down. He wants to show just a little progress in next weeks meeting with the president, then he can buy a little time to try some other cost-cutting measures he has been considering. He wants to raise the estimate of percentage completion of Novembers WIP inventory to 90 percent. He believes it will increase the number of equivalent units. Then the unit conversion cost will be a little lower.

Discuss whether Johns suggested manipulation of the percentage completion of end WIP will have the desired effects (all other assumptions remains unchanged) on profits (show workings to support your conclusions).

The work-in-process (WIP) inventory consisted of 40,000 partially completed units on November 1. The belts were 25 % complete as to conversion cost. The costs included in the inventory on November 1 were as follows:

Leather strips	$96,000
Buckles	46,000
Conversion costs	16,000
Total	$158,000

During November 760,000 leather strips were placed into production. A total of 700,000 leather belts were completed. The WIP inventory on November 30 consisted of 70,000 belts, which were 10 percent complete as to conversion.

The costs charged to production during November were as follows:

Leather strips	$1,945,600
Buckles	874,000
Conversion costs	1,141,390
Total	$3,960,990