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 10% 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 $73,980 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 inventory. During the year, 290,000 units were transferred in from the prior processing department and 274,000 units were completed and sold. Costs transferred in from the prior department totaled $75,835,000. No materials are added in the final processing department. A total of $19,932,600 of conversion cost was incurred in the final processing department during the year.

Required:

1. Tom Winthrop estimated that the units in ending work in process inventory in the final processing department were 25% 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?

2. Does Gary Stevens want the estimated percentage completion to be increased or decreased?

3. What percentage completion would result in increasing reported net operating income by $73,980 over the net operating income that would be reported if the 25% figure were used?

Answer 1

Solution 1:

Computation of Equivalent unit of Production - Weighted Average
Particulars	Physical Units	Prior Deptt Cost	Conversion
Unit completed & Transferred out	274000	274000	274000
Closing WIP:	16000
Prior Department (100%)		16000
Conversion (25%)			4000
Equivalent units of production	290000	290000	278000

Computation of Cost per equivalent unit of Production - Weighted Average
Particulars	Prior Deptt Cost	Conversion
Opening WIP	$0.00	$0.00
Cost Added during the year	$75,835,000.00	$19,932,600.00
Total cost to be accounted for	$75,835,000.00	$19,932,600.00
Equivalent units of production	290000	278000
Cost per Equivalent unit	$261.50	$71.70

Computation of Cost of ending WIP and units completed & Sold - Weighted Average
Particulars	Prior Deptt Cost	Conversion	Total
Equivalent unit of Ending WIP	16000	4000
Cost per equivalent unit	$261.50	$71.70
Cost of Ending WIP (Equivalent unit * Cost per equivalent unit)	$4,184,000	$286,800	$4,470,800
Units completed and transferred	274000	274000
Cost of units completed & Sold (Unit completed * cost per equivalent unit)	$71,651,000	$19,645,800	$91,296,800

Hence cost of goods sold for the year = $91,296,800

Solution 2:

Gary want estimated percentage completion to be increased so that total equivalent unit should be increased and cost per equivalent unit should be decreased resulting in decrease of cost of goods sold.

Solution 3:

Required cost of goods sold to attain target profit = $91,296,800 - $73,980 = $91,222,820

Cost of prior department will remain the same, therefore

Target conversion cost of goods sold = $91,222,820 - $71,651,000 = $19,571,820

Equivalant unit of conversion for units completed and sold = 274000

Target cost per equivalent unit = $19,571,820 / 274000 = $71.43

Total equivalant units of conversion to achieve target cost per equivalant unit = $19,932,600 / $71.43 = 279051

Equivalent unit of ending WIP with respect to conversion = 279051 - 274000 = 5051

Target Percentage completion of ending WIP = 5051 / 16000 = 31.57%