Ethics: Manipulating Percentage of Completion Estimates. Computer Tech Corporation produces computer keyboards, and its fiscal year ends on December 31. The weighted average method is used for the company's process costing system. As the controller of Computer Tech, you present December's production cost report for the Assembly department to the president of the company. The Assembly department is the last processing department before goods are transferred to finished goods inventory. All 160,000 units completed and transferred out during the month were sold by December 31. The board of directors at Computer Tech established a compensation incentive plan that includes a substantial bonus for the president of the company if annual net income before taxes exceeds $2,000,000. Preliminary figures show current year net income before taxes totaling $1,970,000, which is short of the target by $30,000. The president approaches you and asks you to increase the percentage of completion for the 40,000 units in ending WIP inventory to 90 percent for direct materials and to 95 percent for direct labor and overhead. Even though you are confident in the percentages used to prepare the production cost report, which appears as follows, the president insists that his change is minor and will have little impact on how investors and creditors view the company. A G 1 Data Entry Section Unit Information Percent Complete Direct Direct materials n/a Units labor Overhead Units in beginning WIP Inventory (all completed this period) Units started and completed during the period Units started and partially completed during the period 50,000 110,000 n/a n/a 100% 60% 100% 40% 100% 6. 40,000 40% Direct Direct Cost Information labor Overhead 8 6. 10 11 materials Costs in beginning WIP Inventory Costs incurred during the period $80,000 $210,000 S30.000 $85.000 $28,000 $72.000 12 13 Computer Tech Company 14 Assembly Department Production Cost Report Month Ending December 31 Step 1: Summary of Physical Units and Equivalent Unit Calculations Physical Units 15 16 17 18 19 20 Units to be accounted for Units in beginning WIP Inventory Units started during the period Total units to be accounted for 50,000 150,000 200,000 21 22 Equivalent Units Direct labor 160,000 16.000 Direct Physical Units 160.000 23 24 25 26 Units accounted for Units completed and transferred out Units in ending WIP Inventory Total units accounted for Overhead 160,000 materials 160.000 40,000 200.000 24,000 184.000 16,000 176.000 176.000 27 28 check: total units to be accounted for = total units accounted for? if so, amount = 0 ----> Step 2: Summary of Costs to be Accounted for Direct materials S80,000 210,000 Direct 29 30 31 32 Costs to be accounted for Costs in beginning WIP Inventory Costs incurred during the period Total costs to be accounted for Overhead labor S30.000 85,000 $290.000 $115,000 S100.000 Total $28,000 $138,000 367,000 $505,000 72,000 33 34 check: total costs to be accounted for = total costs accounted for? If so, amount = $0 ---> Step 3: Calculation of Cost per Equivalent Unit SO Direct Direct labor $290,000 $115,000 $100,000 176,000 S0.6534 35\ materials Overhead Total 37 38 Total costs to be accounted for (a) Total equivalent units accounted for (b) Cost per equivalent unit (a) / (b) 184.000 $1.5761 176.000 $0.5682 S2.7977 39 40 Step 4: Assign Costs to Units Transferred Out and Units in Ending WIP Inventory Direct Direct 41 materials $252,176 S104,544 37,826 Overhead S90,912 S447,632 9,091 labor Total 42 43 44 45 Costs assigned to units transferred out Costs assigned to ending WIP Inventory Rounding difference Total costs accounted for 10,454 57,372 (4) $505.000 46 Required: 1. Why is the president asking you to increase the percentage of completion estimates? 2. Prepare another production cost report for Computer Tech Company that includes the president's revisions. Indicate what impact the president's request will have on cost of goods sold and on net income (ignore income taxes in your calculations). 3. As the controller of the company, how would you handle the president's request? 5669959