From Chapter 4 Problem #38

Ethics: Manipulating Percentage of Completion Estimates. Computer Tech Company produces computer keyboards, and its fiscal year ends on December 31. The weighted average method is used for the companys process costing system. As the controller of Computer Tech, you present Decembers 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.

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 presidents revisions. Indicate what impact the presidents 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 presidents request? (If necessary, review the presentation of ethics in Chapter 1 How Is Managerial Accounting Used to Help Organizations? (Links to an external site.)for additional information.)