Pines and Lopez are inflating the percentage of Work-in-Process inventory that is completed in order to receive their bonus in a timely manner.
STUDENT 1: Megan
Pines and Lopez are inflating the percentage of Work-in-Process inventory that is completed in order to receive their bonus in a timely manner. By claiming to have finished more inventory than what was actually completed, it allows them to not only look more favorable to the person in charge of bonuses, but it also makes it appear that the actual costs to make a higher percentage are lower than they should be. If the actual cost had decreased during the production of a higher percentage of finished inventory, it would throw off many predictions for the company.
Since the particle board division of High Mountain Lumber is the largest division, if Green does not fix the percentage back to the actual number, it will heavily impact calculations – the company would likely be under allocated for many accounts and think they have more excess money than they actually do. Equivalent Units of Production are used to determine the costs of materials, labor, and other related things – these calculations would be off and could have major consequences for the company (Miller-Nobles, 2017, p. 1067).
Lopez’s justification is slightly understandable, everyone wants a little bit of money and when a bonus is involved some people will make poor decisions. Despite this, it is not justifiable. This scenario would have a heavy impact on High Mountain Lumber’s financial statements for quite some time and if the company was audited, Lopez and others could be in big trouble.
Overall, it is obvious that the situation is unethical. The inflation is being done for personal benefit and is not an accurate portrayal of the current production numbers. There are many consequences for not only the company, but also for Lopez and Pines if the situation were not fixed immediately. Green should also go ahead and fix the information before it is passed on to the next destination.
Reference
Miller-Nobles, T. L.(2017). Horngren’s Accounting, 12th Edition [VitalSource Bookshelf version].Retrieved from vbk://9780134487199
STUDENT 2: Tasha
When the completion rate of the works-in-process is increased, more of the completed products are on hand to sell to the buyers. In a just-in-time process, this is important because they need to quickly turn a profit and buy more raw materials to make more. There is not a lot of surplus inventory, so in order to sell more, they have to produce the final particle boards as efficiently possible.
Another thing the increased completion percentage does is lower the cost per item.When product is completed, it is then transferred to either a new department or as finished goods on the balance sheet. The cost per item is affected by the distinguishing between the completed items and the in-progress items.These are called Equivalent Units of Production, which allow businesses to distinguish between partially finished and finished products in measuring costs of materials and labor (Miller-Nobles, Mattison, & Matsumura, 2018).The higher the percentage of completion, the higher the equivalent units of production. This, in turn, drives the cost per unit down.When the cost per unit looks lower, the profit looks greater. This adjustment may be enough to meet the profit goal needed for rick and Joe to receive their bonuses.
If left uncorrected, this could lead to orders being ordered based on the anticipation that the work is closer to being finished than they truly are, creating a backlog and long line of unhappy customers.Additionally, this estimation would give the appearance that the company is making more money than they truly are, which trickles down in other areas.For instance, the payout of bonuses are based on false information, which the company has to pay out. The true profits may not be able to absorb the payout of the bonuses as easily.
While this adjustment would help with this year’s numbers, it would make next year’s numbers that much harder. The overestimated completion percentage this year will lead to an underestimated completion percentage of the remaining items. This would drive the cost per unit up beyond what it should truly be.
Accurate reporting is always important for the decision makers, both inside and outside of the company. They need to have the proper information to make the decisions that are best for the company or for their investors.Green could lower the estimates herself. This could be problematic because she may not be qualified to judge the completion percentage. She could also request that Rick and Joe take another look and provide estimates are more accurate.If that does not work, she should go to management to inform them of the situation. If left unchecked, this could lead to problems further down the road.
References:
Miller-Nobles, T. L., Mattison, B. L., & Matsumura, E. M. (2018). Horngren’s Accounting. Pearson.
Answer preview Pines and Lopez are inflating the percentage of Work-in-Process inventory that is completed in order to receive their bonus in a timely manner.
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