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ACCT505 - Managerial Accounting Case Study Chapter 4 - Process Costing 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 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 $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. 3. Do you think Mary James should go along with the request to alter estimates of the percentage completion? Why or why not? 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. Which ethical issues is Mary 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. Direct Materials Direct Labor Total Estimated Manufacturing Overhead $40 per unit $20 per unit $8,400,000 Solution 440,000 Hours Steps 1 and 2 Direct Materials Direct Labor Manufacturing Overhead a. $8,400,000 / 440,000 b. $8,400,000 / 420,000 $ $ 40.00 20.00 $ 19.09 420,000 Hours $ $ 40.00 20.00 $ 20.00 Product Cost Per Unit $ 79.09 $ 80.00 Overhead Applied (assuming 441,000 units) $ 8,419,091 $ 8,820,000 Actual Overhead Incurred $ 8,500,000 $ 8,500,000 Overhead Over/(Under) Applied $ (80,909) $ 320,000 Step 3 Net Income Before Adjustment Over/(Under) Applied Overhead Adjustment Revised Net Income 840,000 Units $ $ 1,000,000 (80,909) 919,091 820,000 Units $ $ 1,000,000 320,000 1,320,000 This question may generate lively debate. Where should Terri Ronsin's loyalties lie? Is she working for the general ma for the corporate controller? Is there anything wrong with the \"Christmas bonus\"? How far should Terri go in bucking her While individuals can certainly disagree about what Terri should do, some of the facts are indisputable. First, underst artificially inflates the overhead rate. This has the effect of inflating the Cost of Goods Sold in all months prior to Decemb costs of inventories. In December, the huge adjustment for overapplied overhead provides a big boost to net operating in practice results in distortions in the pattern of net operating income over the year. In addition, because all of the adjustm Goods Sold, inventories are still overstated at year-end. This means, of course, that the net operating income for the enti While Terri is in an extremely difficult position, her responsibilities under the IMA's Statement of Ethical Professional The Credibility Standard states that management accountants have a responsibility to \"disclose all relevant information th expected to influence an intended user's understanding of the reports, analyses or recommendations.\" In our opinion, Te situation with her immediate supervisor in the controller's office at corporate headquarters. This step may bring her into general manager of the division, so it would be a very difficult decision for her to make. In the actual situation that this case is based on, the corporate controller's staff were aware of the general manager' management of the company supported the general manager because \"he comes through with the results\" and could be annual profit targets for his division. Personally, we would be very uncomfortable supporting a manager who will resort t achieve \"results.\" If the manager will pull tricks in this area, what else might he be doing that is questionable or even perh working for the general manager of the division or ould Terri go in bucking her boss on a new job? e indisputable. First, understating direct labor-hours all months prior to December and overstating the big boost to net operating income. Therefore, the , because all of the adjustment is taken to Cost of perating income for the entire year is also overstated. ment of Ethical Professional Practice seem to be clear. e all relevant information that could reasonably be ndations.\" In our opinion, Terri should discuss this This step may bring her into direct conflict with the are of the general manager's accounting tricks, but top th the results\" and could be relied on to hit the a manager who will resort to deliberate distortions to is questionable or even perhaps illegal