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 $70,200 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 270,000 units were completed and sold. Costs transferred in from the prior department totaled $60,030,000. No materials are added in the final processing department. A total of $18,012,500 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 $70,200 over the net operating income that would be reported if the 25% figure were used?

Answer 1

1.

Cost of goods sold

73575000

Working:

Calculation of equivalent units
	Total units	Material		Convesrion
		%	Eq.units	%	Eq.units
Beginning work-in-process	0		0		0
Completed and sold	270000	100%	270000	100%	270000
Ending work-in-process	20000	100%	20000	25%	5000
	290000		290000		275000
Cost to be allocated	Material	conversion	Total
Cost transferred	60030000		60030000
Cost incurred during the year	0	18012500	18012500
Total cost to be allocated	60030000	18012500	78042500
Cost per equivalent unit	207.00	65.50
Cost allocated to
Completed and sold	55890000	17685000	73575000
Ending process stock	4140000	327500	4467500
Total cost allocated	60030000	18012500	78042500

2.

Gary Stevens wants the percentage of completion to be increased, so that the value of ending inventory increases, thereby reducing the cost of goods sold resulting in increase in the net operating income.

3. For achieving an increase of $70,200 in net operating income, the cost of goods sold should be reduced by the same amount.This means the new cost of goods sold should be $73,504,800 ($73,575,000 - $70,200).

Percentage of completion shall have to be increased to 30.5%, to increase the net operating income by $70,200.

Working:

	Total units	Material		Convesrion
		%	Eq.units	%	Eq.units
Beginning work-in-process	0		0		0
Completed and sold	270000	100%	270000	100%	270000
Ending work-in-process	20000	100%	20000	30.5%	6100
	290000		290000		276100
Cost to be allocated	Material	conversion	Total
Cost transferred	60030000		60030000
Cost incurred during the year	0	18012500	18012500
Total cost to be allocated	60030000	18012500	78042500
Cost per equivalent unit	207.00	65.24
Cost allocated to
Completed and sold	55890000	17614542	73504542
Ending process stock	4140000	397958	4537958
Total cost allocated	60030000	18012500	78042500