Understanding the impact of percentage completion on profit - weighted average method
Gary stevens and mary james are production managers in the consumer electronics division of GE company, which has dozens of plants throughout the world. Mary managed the plant in des moines Iowa, while Gary manages in El Segundo California. Production managers are typically paid a salary and get an additional bonus equal to 5% of the base pay if the entire division meets or exceeds its target profits for the year. The bonus is determined in March after the company's annual report comes out. Shortly after beginning the New Year, Mary received a phone call from Gary that went like this:
Gary: I just got the preliminary profit figures for the division for last year and we are within $200,000 of making this year's target profits. All we have to do is pull a few strings and we'll be over the top.
Mary: what do you mean?
Gary: well, one thing that be easy to change is your estimate of the percentage completion of your ending work in process inventories.
Mary: I don’t know if I can do that. Those percentage completion figures are supplied by tom winthorp, my lead superviso, who I always trusted to provide us good estimates. Besides, I already sent the percentage completion figures to HQ.
Gary: you can always tell them it was a mistake. Think about it, all of us managers are doing as much as we can to pull this bonus out.
The final processing department in mary's 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. Costs transferred in from the prior department totaled $39,375,000. No materials are added in the final processing department. A total of $20,807,500 of conversion cost was incurred in the final processing department during the year.
REQUIRED:
1. Tom Winthrop estimated that the units in the 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?
2. Does Gary want the estimated percentage completion to increase or decrease and why?
3. What percentage completion would result in increasing reported net operating income by $200,000 over the net operating income that would be reported if the 30% figure were used?
4. Do you think Mary should go along with the request to alter the estimates, why or why not?