Question

ATC 12-5 Ethical Dilemma Amount of equivalent units René Alverez knew she was in over her head soon after she took the job. Even so, the opportunity for promotion comes along rarely and she believed that she would grow into it. Ms. Alverez is the cost accounting specialist assigned to the finishing department of Standard Tool Company. Bill Sawyer, the manager of the finishing department, knows exactly what he is doing. In each of the three years he has managed the department, the cost per unit of product transferred out of his work in Process Inventory account has declined. His ability to control cost is highly valued, and it is widely believed that he will be the successor to the plant manager, who is being promoted to manufacturing vice president. One more good year would surely seal the deal for Mr. Sawyer. It was little wonder that Ms. Alverez was uncomfortable in challenging Mr. Sawyer's estimate of the percentage of completion of the department's ending inventory. He contended that the inventory was 60 percent complete, but she believed that it was only about 40 percent complete. After a brief altercation, Ms. Alverez agreed to sign off on Mr. Sawyer's estimate. The truth was that although she believed she was right, she did not know how to support her position. Besides, Mr. Sawyer was about to be named plant manager, and she felt it unwise to challenge such an important person. The department had beginning inventory of 5,500 units of product and it started 94,500 units during the period. It transferred out 90,000 units during the period. Total transferred-in and production cost for the period was $902,400. This amount included the cost in beginning inventory plus additional costs incurred during the period. The target (standard) cost per unit is $9.45. Required a. Determine the equivalent cost per unit, assuming that the ending inventory is considered to be 40 percent complete. b. Determine the equivalent cost per unit, assuming that the ending inventory is considered to be 60 percent complete. c. Comment on Mr. Sawyer's motives for establishing the percentage of completion at 60 percent rather than 40 percent. d. Assuming that Ms. Alverez is a certified management accountant, would informing the chief accountant of her dispute with Mr. Sawyer violate the confidentiality standards of ethical professional practice in @ Exhibit 1.17 of @ Chapter 1? e. Did Ms. Alverez violate any of the standards of ethical professional practice in Exhibit 1.17 of Chapter 1? If so, which ones? f. Discuss the components of the fraud triangle that affected Ms. Alverez's behavior.

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.

Answer 1

a.

Cost of Production Report for Finishing Department
Equivalent Units
Quantities:	Actual	Equivalent units
Beginning inventory	5,500
Units added to production	94,500
Total to be accounted for	100,000
Transferred-out	90,000	x 100%	90,000
Ending inventory	10,000	x 40%	4,000
Total accounted for	100,000		94,000
Cost per Unit
Cost per unit $902,400 ÷ 94,000 = $9.60

b.

Cost of Production Report for Finishing Department
Equivalent Units
Quantities:	Actual	Equivalent units
Beginning inventory	5,500
Units added to production	94,500
Total to be accounted for	100,000
Transferred-out	90,000	x 100%	90,000
Ending inventory	10,000	x 60%	6,000
Total accounted for	100,000		96,000
Cost per Unit
Cost per unit $902,400 ÷ 96,000 = $9.40

c.

The finishing department will report an unfavorable variance ($9.60 actual cost versus $9.45 standard) if ending inventory is classified as 40% complete. Conversely, the department will report a favorable variance ($9.40 actual cost versus $9.45 standard) if the ending inventory is classified as 60% complete. Given the importance of his image as a manager who controls costs, it seems obvious that Mr. Sawyer is trying to manipulate the ending inventory balance for reasons of self-interest.

d.

It would not be a violation of confidentiality for Ms. Alverez to report her dispute with Mr. Sawyer to the chief accountant. Indeed, she should be reporting to the chief accountant instead of Mr. Sawyer. Accountants require independence to effectively perform their duties.

e.

Alverez appears to have violated the competency standard that requires accountants to maintain an appropriate level of professional competence by ongoing development of their knowledge and skills. She also violated the integrity standard by signing off on something she thought was incorrect.

f.

Alverez’s desire to maintain her own promotion opportunity in the company is the pressure in the fraud triangle. The lack of supervision from her immediate supervisor is the opportunity. Although, no clear rationalization on her part has been disclosed on the case, her lack of personal integrity makes her feel no remorse for her action.