Problem
Rick Pines and Joe Lopez are the plant managers for High Mountain Lumbers particle board division. High Mountain Lumber has adopted a just-in-time management philosophy. Each plant combines wood chips with chemical adhesives to produce particle board to order, and all product is sold as soon as it is completed, laura Green is High Mountain Lumbers regional controller. All of High Mountain Lumber's plants and divisions send Green their production and cost information. While reviewing the numbers of the two particle board plants, she is surprised to find that both plants estimate their ending Work-in-Process Inventories at 75% complete, which is higher than usual. Green calls Lopez, whom she has known for some time. He admits that to ensure their division would meet its profit goal and that both he and Pines would make their bonus (which is based on division profit), they agreed to inflate the percentage completion. Lopez explains, "Determining the percent complete always requires judgment. Whatever the percent complete, well finish the Work-in-Process Inventory first thing next year."
Requirements
a. How would inflating the percentage completion of ending Work-in-Process Inventory help Pines and Lopez get their bonus?
b. The particle board division is the largest of High Mountain Lumber's visions. If Green does not correct the percentage completion of this year's ending Work- in-Process Inventory, how will the misstatement affect High Mountain Lumber's financial statements?
c. Evaluate Lopez's justification, including the effect, if any, on next year's financial statements.
d. Address the following: What is the ethical issue? What are the options? What are the potential consequences? What should Green do?