Walter Boggs and Sydney Button have been friends their whole lives. They started playing guitar as young boys and performed together for 30 years all over the world as a singer/songwriter duo. They never struck it rich, but they had a wonderful career and were able to put enough money away to retire comfortably. They retired and bought homes beside each other on the same block of the neighbourhood they grew up in. Their retirement lasted for 2 years before they started feeling restless. They didn't want to go on the road to perform anymore, but over the years, they had started to make their own guitars. They had sold a few to other musicians and the idea started to form that they should make their own guitars. Word spread quickly and 6 months before they started, they already had more orders than they could fulfill.

Their only problem was making sure that the cost of the guitars was calculated correctly in order to satisfy income tax purposes. They'd had a bit of a problem with income taxes during their performing career and they didn't want to get into trouble with their new business. So they sent some of their information to a friend to look at:

Finishing Department for the month of June:

Cost per unit = $1,605.86 (Total cost in the Finishing Department of $93,140, divided by the total number of units that were moved into Finished Goods and able to be sent to customers)

At the beginning of June, 30 units were already started and they had a total of $22,270 in costs associated with them ($12,000 transferred in and $1,350 in DM). Sixty-five guitars were transferred into the Finishing Department from the Fabrications Department in June.

The Finishing Department added $3,880 in direct materials and $19,600 in conversion costs during June. $47,390 was transferred in from the Fabrications Department.

Once Walter and Sydney's friend had looked at the information, he sent a message requesting more detail on the percentage of work already done on the guitars that had been started at the beginning of June and on the ones that were still being worked on at the end of June. Walter and Sydney hadn't kept track of that, but they said they could reasonably estimate that the ones at the beginning of the month already had 70% of the DM added and

50% of the rest of the costs, while the guitars that they were still working on at the end of

June had about 80% of the DM added and about 60% of the rest of the costs. Their friend thanked them and said that they would hear from him shortly with some recommendations.

Ethical Issue

I5-65 Evaluate an ethical dilemma regarding percentage of completion

(Learning Objectives 2 & 5)

Danielle Bazinet and Annadine Lue are the plant managers for Pacific Lumber's particle board division. Pacific Lumber has adopted a JIT management philosophy. Each plant combines wood chips with chemical adhesives to produce particle board to order, and all production is sold as soon as it is completed. Din Nguyen is Pacific Lumber's regional controller.

All of Pacific Lumber's plants and divisions send Nguyen their production and cost information. While reviewing the numbers of the two particle board plants, he is surprised that both plants estimate their ending work in process inventories at 80% complete, which is higher than usual. Nguyen calls Lue, whom he has known for some time. She admits that to ensure that their division met its profit goal and that both she and Bazinet would make their bonus (which is based on division profit), she and Bazinet agreed to inflate the percentage completion. Lue explains, "Determining the percentage completion always requires judgment. Whatever the percentage completion, we will 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 Bazinet and Lue get their bonus?

2. The particle board division is the largest of Pacific Lumber's divisions. If Nguyen does not correct the percentage completion of this year's ending work in process inventory, how will the misstatement affect Pacific Lumber's financial statements?

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

4. In considering what Nguyen should do, answer the following questions:

a. What is the ethical question?

b. What are the options?

c. What are the possible consequences?

d. What should Nguyen do?