Question

Maredo Leather Company manufactures top quality leather used by Roe and Adler, LLC in their manufacture of airplane seat covers. The production manager at Maredo has been under pressure from the company president to reduce the cost of conversion. In spite of several attempts to reduce conversion costs, they have remained more or less constant. Now the manager is faced with an upcoming meeting with the company president, where he will have to explain his failure to reduce conversion costs. The manager goes to the company controller with the following request. He explains that he is under pressure to reduce cost in the production process, but there is no way to reduce material costs. He explains that if he can just show a little progress in his meeting with the president then he can buy some time to try some other cost-saving measures. He asks the controller to raise the estimate of the percentage of completion of the ending inventory for the month to 60 percent. This will increase the number of equivalent units and the unit conversion cost will be a little lower. Use the following to answer the questions below:

October 1 Work-in-Process 400 units

Conversion 25% complete

Inventory costs as of Oct 1:

Leather $990

Dye 260

Conversion costs 300

Total $1,550

During October 7,600 leather fabric pieces were placed into production. A total of 7,000 leather fabric pieces were completed. The work-in-process inventory on October 31 consisted of 1,000 leather fabric pieces with were 50 percent complete as to conversion. The costs charged to production during October were:

Leather $19,990

Dye 5,250

Conversion costs 20,700

Total $45,850

-By how much would the managers suggested manipulation lower the unit conversion costs?

-What should the controller do?

-Discuss this situation in terms of ethics and cite specific ethical standards for managerial accountants.

Answer 1

WORKING NOTE1: CALCULATION OF EQUIVALENT UNITS AS PER PRESNT SCENERIO

UNITS DEGREE OF COMPLETION MATERIAL&CONVERSION COST

OPENING WIP 400 75% 300 UNITS

INTRODUCED 6600 100% 6600 UNITS

CLOSING WIP 1000 50% 500 UNITS

7400 UNITS =TOTAL

CALCULATION OF EQUIVALENT UNITS AS PER MANAGERS PROPOSAL(i.e, 60% completion )

UNITS DOC% MATERIAL&CONVERSION COST

OPENING WIP 400 75% 300 UNITS

INTRODUCED 6600 100% 6600 UNITS

CLOSING WIP 1000 60% 600 UNITS

7500 UNITS=TOTAL

CALCULATION OF CONVERSION COST PER UNIT

SCENERIO 1: PRESENT CASE

MATERIAL ($) CONVERSION COST($)

OPENING WIP COST 1250 300

INTRODUCED 25240 20700

TOTAL 26490 21000

EQUIVALENT UNITS 7400 UNITS 7400 UNITS

(PRESENT CASE)

COST PER UNIT 3.58(APPROX) 2.84(APP)

EQUIVALENT UNITS 7500 UNITS 7500 UNITS

COST PER UNIT 3.53 2.8

(MANAGERS PROPOSAL)

UNIT CONVERSION COST SHALL GET REDUCED IF MANAGERS PROPOSAL IS ACCEPTED.

SPECIFIC ETHICAL STANDARDS FOR MANAGERIAL ACCOUNTANTS ARE

1.CONFIDENTIALITY

2.INTEGRITY

3.COMPETENCE

4CREDIBILITY