Question - The final processing department in Mary's production facility began the year with no work in process inventories. During the year, 210,000 units were transferred in from the prior processing department and 200,000 units were completed and sold. Cost transferred in from the prior department totaled $39,375,000. No materials were added in the final processing department. A total of $20,807,500 of the conversion cost was incurred in the final processing department during the year.
Tom Winthrop estimated that the units in ending inventory in the final processing department were 30% 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? (Since all unit completed were sold, the cost of good transferred out = Cost of Good Sold.
Gary is recommending that the completion percentage be adjusted by 15 percentage points in order to assist the team in making their bonus.
A) Calculate the cost of goods sold if the ending inventory is 15% complete in regard to conversion costs. Would the net income increase of decrease if this option was chosen over the 30% completion percentage? How much is the increase?
B) Calculate the cost of goods sold if the ending inventory is 45% complete in regard to conversion costs. Would the net income increase of decrease if this option was chosen over the 30% completion percentage? How much is the increase?
C) Based on your calculations, which percentage is Gary suggesting that Mary use for ending her inventory calculations?
D) You think Mary James should go along with the request to alter the estimates of the percentage completion? Why or Why not?