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Refer to the scenario located in the “Analyze, Think, Communicate” section 12-5 of Ch. 12, “Job-Order, Process, and Hybrid Costing Systems” of Fundamental Managerial Accounting Concepts. This scenario involves an altercation between Rene Alverez and Bill Sawyer and requires you to weigh in with calculations and comments on the matter.

Read the scenario in the textbook and complete the activity below.

Compute the equivalent cost per unit, assuming the ending inventory is considered to be 40 percent complete.

Compute the equivalent cost per unit, assuming the ending inventory is considered to be 60 percent complete.

Write a 350-word summary of your calculations and findings. Comment on Mr. Sawyer’s motives for establishing the percentage of completion at 60 percent rather than 40 percent.

Submit calculations and summary.

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Percentage of completion case study

Percentage of completion case study

Favourable conditions happen when the actual cost per unit is below the standard set for the department. On the other hand, the unfavourable conditions happened when the actual cost per unit is higher than the standard cost (Lee & Kwon, 2020). Unfavourable cost per unit will mean that there has been some mismanagement of the whole process and therefore a higher cost than anticipated (Ji, 2019). The repercussions of recording 60% and 40% completion are as follows. In both cases, the standard cost per unit is set as $9.45. If they choose to record a 40% completion rate on the goods, they will increase the cost of goods to around $9.60 per unit. This cost per unit is unfavourable as it is above the standard cost of $9.45. On the other hand, following the calculations, if the department chooses to record a 60% completion on the goods, it would mean that they record a $9.40 cost on the goods. This new cost per unit is below the standard cost per unit of $9.45 which is favourable. This favourable cost would mean that Mr. Sawyer is working right and that he is controlling the production costs. Reporting unfavourable costs per unit would taint his image as a cost controller and would jeopardize his chances of being promoted.

The fact that Mr. Sawyer is seen as the next candidate to take over as the plant manager, he does not want to risk the chance by recording unfavourable cost per unit in this year’s production. He is under pressure to produce the favourable results similar to the other three years. Therefore, Mr. Sawyer is deliberately manipulating the records in order to serve his own interest of getting that promotion from a finished goods manager to the plant manager. Ms. Alvarez on the other hand knew that the results were wrong but could not prove it. However with these calculations, she can comfortably back up her claims in case she wants to go out and report Mr. Sawyer. It would be unethical for Ms. Alvarez not to report the manager of finishing department who is reporting fraudulent claims in order to get ahead in his career.

References

Ji, H. M. (2019). The Usefulness of Accounting Information Derived by Applying the Percentage of Completion Method to Enhance Sustainable Business Practices: Evidence from South Korea. Sustainability11(1), 7.

Lee, N., & Kwon, K. H. (2020). Revenue Recognition on Percentage of Completion Basis and Firm Value. International Journal of Business and Society21(1), 25-41.