Missy Meyers and Russell Woodcock are the plant managers for Southwest Mountain Lumber's particle board division. Southwest Mountain Lumber has adopted a just-in-time management philosophy. Each plant combines wood chips with chemical adhesives to produce particle board to order, and all product is sold as soon as it is completed. Amy Summers is Southwest Mountain Lumber's regional controller. All of Southwest Mountain Lumber's plants and divisions send Summers their production and cost information. While reviewing the numbers of the two particle board plants, she is surprised to find that both plants estimate their ending Work-in-Process Inventories at 75% complete, which is higher than usual. Summers calls Meyers, whom she has known for some time. She admits that to ensure their division would meet its profit goal and that both she and Woodcock would make their bonus (which is based on division profit), they agreed to inflate the percentage completion. Meyers explains, "Determining the percent complete always requires judgment. Whatever the percent complete, we'll finish the Work-in-Process Inventory first thing next year."

Requirements

1. How would inflating the percentage completion of ending Work-in-Process Inventory help Meyers and Woodcock get their bonus?

2. The particle board division is the largest of Southwest Mountain Lumber's divisions. If Summers does not correct the percentage completion of this year's ending Work-in-Process Inventory, how will the misstatement affect Southwest Mountain Lumber's financial statements?

3. Evaluate Meyer's justification, including the effect, if any, on next year's financial statements.

4. Address the following: What is the ethical issue? What are the options? What are the potential consequences? What should Summers do?