Laura Green is High Mountain Lumber’s controller. All of the firm’s plants and divisions send their production and cost information to her. While reviewing the numbers for the two particle board plants, she is surprised to find that both plants have estimated their WIP ending inventories to be 75% complete, which is higher than usual.
When Laure Green calls Joe Lopez, he admits that to ensure that their division would meet its profit goal and that he and Rick Pines would get their bonuses (which are based on division profit), they had agreed to inflate the percentage of completion.
Joe Lopez explains, “Determining the percent complete always requires judgment. Whatever the percent complete, we’ll finish the WIP first thing next year.”
1. How would inflating the percentage of completion for ending WIP help Pines and Lopez to get their bonuses?
2. The particle board division is the largest division at High Mountain Lumber. If Laura Green does not correct the percentage of completion for this year’s ending WIP, how will the misstatement affect High Mountain Lumber’s financial statements for this year? What about next year’s financial statements?
3. Evaluate Joe Lopez’s justification for his actions.
4. What is the ethical issue in this case? What are Laura Green’s options? What are the potential consequences of each option? What should Laura Green do?
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WIP is component of sales or total revenue while making financial report. The increase in WIP will increase the sales which in turn able the Rick and Joe to achieve their target so that they will be applicable for the bonus. Hence, Increase in sales in turn will help them to achieve their target and bonuses are generally tied up with the Revenue. So higher revenue due to increase WIP means higher sales and means target achievement which in turn ensures their bonuses....