Amanda McNall, is the corporate controller of Scott Quarry. Scott Quarry operate

Question

Amanda McNall, is the corporate controller of Scott Quarry. Scott Quarry operates 12 rock crushing plants in Scott County, Kentucky, that process huge chunks of limestone rock extracted from underground mines.

Given the competitive landscape for pricing. Scott's managers pay close attention to costs. Each plant uses a process-costing system, and at the end of every quarter, each plant manager submits a production report and a production-cost report. The production report includes the manager's estimate of the percentage of completion of the ending work in process as to direct materials and conversion costs, as well as the level of processed limestone inventory.

McNall uses these estimatesto compute the cost per equivalent unit of work done for each input for the quarter. Plants are ranked from 1 to 12, and the three plants with the lowest cost per equivalent unit for direct materials and conversion costs are each given a bonus and recognized in the company newsletter. McNall has been pleased with the success of her benchmarking program. However, she has recently received anonymous emails that two plant managers have been manipulating their monthly estimates of percentage of completion in an attempt to obtain the bonus.

1) Why and how might managers manipulate their monthly estimates of percentage of completion and level of inventory?

2) McNall's first reaction is to contact each plant controller and discuss the problem raised by the anonymous communications. Is that a good idea?

3) Assume that each plant controller's primary reporting responsibility is to the plant manager and that each plant controller receives the phone call from McNall mentioned in requirement 2. What is the ethical responsibility of each plant controller (a) to Amanda McNall and (b) to Scott Quarry in relation to the equivalent-unit and inventory information each plant provides?

4) How might McNall learn whether the data provided by particular plants are being manipulated?

I would like some help on this question, please, thank you!

Explanation / Answer

1>

the plant managers manipulate the results in order to earn the bonus.

A plant manager can manipulate the monthly estimate of percentage of completion by understating the total number of steps yet to be undertaken before a unfinished good becomes a finished good.

and by doing so the level of inventory has some discrepancy .

2> this might not be a good idea as , when McNall discusses the letters with individual plant controllers and during this episope the plant manager might not be kept in the loop . The plant controller has responsibility for preparing the accounting reports from the plant, the plant controller, in most cases, reports to the plant manager. If this relationship exists, Then McNall may create a conflict of interest situation for the plant controller. Hence its not a good idea.

3>

The plant controller's primary responsibilities towards McNall and towards Scott Quarry should be the same. The responsiblity include:

The plant controller is expected to have the competence to make equivalent unit computations. This competence does not always extend to making estimates of the percentage of completion of a product.

Objectivity: The plant controller should not allow the possibility of the division being written up favorably in the company newsletter to influence the way equivalent unit costs are computed.

4> McNall could learn whether the data provided by particular plants are being manipulated

a. McNall could have plant controllers report detailed breakdowns on the stages of production and then carry end-of-month audits to verify the actual stages completed for ending work in process.

b. McNall could examine pattern over time in ending work in process. Units that report low amounts of ending work in process relative to total production are not likely to be able to greatly affect equivalent cost amounts by manipulating percentage of completion estimates. Units that show sizable quantities of total production in ending work in process are more likely to be able to manipulate equivalent cost computations by manipulating percentage of completion estimates.

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