The final processing department in Carol\'s production facility began the year w
ID: 2350493 • Letter: T
Question
The final processing department in Carol's production facility began the year with no work in process inventories. During the year, 270,000 units were transferred in from the prior processing department and 250,000 units were completed and sold. Costs transferred in from the prior department totaled $49,221,000. No materials are added in the final processing department. A total of $16,320,000 of conversion cost was incurred in the final processing department during the year.Jean Jackson estimated that the units in ending 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 Thad Kostowski want the estimated percentage completion to be increased or decreased? Explain why.
3. What percentage completion figure would result in increasing the reported net operating income by $62,500 over the net operating income that would be reported if the 25% figure were used?
4. Do you think Carol Lee should go along with the request to alter estimates of the percentage completion? Why or why not?
Explanation / Answer
Transferred In
Conversion
Units completed and sold....................
250,000
250,000
Ending work in process:
Transferred in:
20,000 units x 100% complete.........
20,000
Conversion:
20,000 units x 25% complete...........
5,000
Equivalent units of production.............
270,000
255,000
Transferred In
Conversion
Cost of beginning work in process........
$ 0
$ 0
Cost added during the period..............
49,221,000
16,320,000
Total cost (a).....................................
$49,221,000
$16,320,000
Equivalent units of production (b)........
270,000
255,000
Cost per equivalent unit, (a) ÷ (b).......
$182.30
$64.00
Cost of goods sold = 250,000 units × ($182.30 + $64.00) per unit = $61,575,000.
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2. Does Thad Kostowski want the estimated percentage completion to be increased or decreased? Explain why.
The estimate of the percentage completion of ending work in process inventories affects the unit costs of finished goods and therefore the cost of goods sold. Thad Kostowski would like the estimated percentage completion of the ending work in process to be increased. The higher the percentage of completion of ending work in process, the higher the equivalent units for the period and the lower the unit costs.
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3. What percentage completion figure would result in increasing the reported net operating income by $62,500 over the net operating income that would be reported if the 25% figure were used?
Increasing the percentage of completion can increase net operating income by reducing the cost of goods sold. To increase net operating income by $62,500, the cost of goods sold would have to be decreased by $62,500 from $61,575,000 down to $61,512,500
X = 6,000 ÷ 20,000 = 30%
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4. Do you think Carol Lee should go along with the request to alter estimates of the percentage completion? Why or why not?
Carol is in a very difficult position. Collaborating with Thad Kostowski in subverting the integrity of the accounting system is unethical by almost any standard.
To put the situation in its starkest light, Kostowski is suggesting that the production managers lie in order to get their bonus. Having said that, the peer pressure to go along in this situation may be intense.
It is difficult on a personal level to ignore such peer pressure.
Moreover, Carol probably prefers not to risk alienating people she might need to rely on in the future.
Carol should be careful not to accept at face value Kostowski’s assertion that all of the other managers are “doing as much as they can to pull this bonus out of the hat.”
Those who engage in unethical or illegal acts often rationalize their own behavior by exaggerating the extent to which others engage in the same kind of behavior.
Other managers may actually be very uncomfortable “pulling strings” to make the target profit for the year.
Transferred In
Conversion
Units completed and sold....................
250,000
250,000
Ending work in process:
Transferred in:
20,000 units x 100% complete.........
20,000
Conversion:
20,000 units x 25% complete...........
5,000
Equivalent units of production.............
270,000
255,000
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