Gary Stevens and Mary James are production managers in the Consumer Electronics Division of Goneral Electronics Company which has several dozen plants scattered in locations throughout the world. Mary manages the plant located in Des Moines, lowa, 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 now year, Mary received a phone call from Gary that went like this: Gary: How's it going, Mary? Mary. Fino, Gary. How's it going with you? Gary: GreatI just got the preliminary profit figures for the division for last year and we are within Dh200,000 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 Tom Winthrop, 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 Dh39,375,000. No materials are added in the final processing department. A total of Dh20,807,500 of conversion cost was incurred in the final processing department during the year Required: Mary James learned that the accuracy of estimating the percentage of completion of the unfinished units depends on the estimator's care, skill, and experience, and the nature of the conversion process. Although Mary James is pretty sure about the estimator's professional judgement, she is still in dilemma. From your own perspective, guide Mary James with THREE (3) pointson whether or not she should go along with the request from Gary Stevens to alter estimates of the percentage completion. (3 marks) b) Assume that Mary James decided to follow Gary Stevens's request, you are going to calculate and explain to her the percentage of completion that would result in increasing reported net operating income by Dh200,000 over the net operating income that would be reported if the 30% figure were used. (Show your workings) (4 marks) a 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 Dos Moines, lowa, 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 Dh200,000 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 Tom Winthrop, 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 Dh39,375,000. No materials are added in the final processing department. A total of Dh20,807,500 of conversion cost was incurred in the final processing department during the year. Required: a) Mary James learned that the accuracy of estimating the percentage of completion of the unfinished units depends on the estimator's care, skill, and experience, and the nature of the conversion process. Although Mary James is pretty sure about the estimator's professional judgement, she is still in dilemma. From your own perspective, guide Mary James with THREE (3) pointson whether or not she should go along with the request from Gary Stevens to alter estimates of the percentage completion (3 marks) b) Assume that Mary James decided to follow Gary Stevens's request, you are going to calculate and explain to her the percentage of completion that would result in increasing reported net operating income by Dh200,000 over the net operating income that would be reported if the 30% figure were used. (Show your workings) (4 marks)
