Question

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.

Gary is recommending that the completion percentage by adjusted by 10 percentage points in order to assist the team in making their bonus.

Required Discussion Points:

Do you think Mary James should go along with the request to alter estimates of the percentage completion? Why or why not?

How will this affect the financial statements?

Who will be affected by this change?

What should she do with this information?

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Answer 1

No, Mary James should not go along with the request to alter estimstes of percentage completion it is because such a practice if adopted Mary James will lead to fraudulent financial reporting as Based on percentage of completion only work in process depends and if she show less work in process this will alter closing stock also, overall it will not be keeping with the very important principle of accounting true and fair view. As this practice will not lead to true and fair view of financial statement item.

This practice is altering percentage of work completed will lower down work in process of the company and will increase the cost of goods sold and thus may reduce gross profit of the company for the year.

This change will have a wide impact on financial statements. Also these production manager will benefit fraudulently by showing more units of goods completed from production and will become entitled to bonus fraudulently.

She should do nothing with this information and should not alter the work in process figure and if possible she may also bring this matters into her supervisor attention who may take the necessary action against the wrongdoers.