Question

Rick Pines and Joe Lopez are the plant managers for High Mountain Lumber’s particle board division. High Mountain Lumber has adopted a just-in-time management philosophy. Each plant combines wood chips with chemical adhesive to produce particle board, and all product is sold as soon as it is completed.

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.”

Questions:

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?

Solution Preview

This material may consist of step-by-step explanations on how to solve a problem or examples of proper writing, including the use of citations, references, bibliographies, and formatting. This material is made available for the sole purpose of studying and learning - misuse is strictly forbidden.

Solution 1
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....

This is only a preview of the solution. Please use the purchase button to see the entire solution

Related Homework Solutions

Accounting Questions
Homework Solution
$77.00
Accounting
Kira’s
Krafts
Inc
Budget
Master
Production
Purchases
Payment
Net
Income
Total
Assets
Cost
Peer Reviewer Conducting A Review Of The Firm
Homework Solution
$50.00
Accounting
Firm Review
Firm Partners
Project Management
Audit Program
Business Documentation
Client Documentation
Transactions
Financial Analysis of Apple Inc (11 slides)
Homework Solution
$50.00
Finance
Business
Presentation
Administration
Management
Companies
Stakeholders
Horizontal Analysis
Vertical Analysis
Balance Sheet
Income Statements
Liquidity Ratios
Current Ratios
Profit
Assets
Calculations
Get help from a qualified tutor
Live Chats