Jean Jackson estimated that the units in ending inventory in the final processing department were 25% 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? The conversion cost is the cost of 100% complete work on the 250,000 units sold, plus 25% complete work on 20,000 units in the inventory. A 25% complete work on 20,000 units is equivalent (for calculation purposes) to 100% complete work on 5,000 units. The conversion cost on the 250,000 units that were sold = 16,320,000 250,000/255,000 = $16,000,000
Cost incurred from the prior department = $49,221,000 sold units/total units = $49,221,000 250,000/270,000 = $45,575,000 Cost of goods sold for the year = $16,000,000 + $45,575,000 = $61,575,000. ——————————————————————————————————————— 2. Does Thad Kostowski want the estimated percentage completion to be increased or decreased? Explain why. Thad wants the estimated percentage completion on the ending inventory to be increased over 25% so that the cost of the goods sold will appear to be lower that reality and will be mistaken as a cost of completion.
This will consequently bump up the profit estimates to the target profits, as Thad wants. ——————————————————————————————————————— 3. What percentage completion figure would result in increasing the reported net operating income by $62,500 over the net operating income that would be reported in the 25% figure we used? According to the above calculations, the 25% complete work on 20,000 units in the inventory cost $16,320,000 – $16,000,000 = $320,000. So each 1% increase in completion will cost 1/25 $320,000 = $12,800.
So to get an increase in the reported net operating income by $62,500 over the net operating income that would be reported in the 25% figure, the percent completion would have to be 25% + 4. 9% = 29. 9 % ——————————————————————————————————————— 4. Do you think Carol lee should go along with the request to alter estimates of the percentage completion? Why or why not? Definitely Carol should not go along with the request to alter estimates of the percentage completion simply because it is an unethical business practice.
To gain a bonus based on false bookkeeping is unethical and will set a bad example to the employees and everyone concerned with the well-being of the company. This bring into question the ethic issue of cost being recorded in the same period as sales incurred. By increasing the work-in-process, thus reducing COGS for finished goods is not a ethical practice; delaying cost to be posted thus increasing the profit margin. To increase net income by corresponding decreasing cost of goods sold and subjectively and erroneously increasing work-in-process is not a generally accepted accounting principle (GAAP)!