Radhika Khrishna is the corporate accountant of Manchester Suits PLC. Manchester Suits has 20 plants world-wide that manufacture basic suits for retail stores. Each plant uses a process-costing system. At the end of each month, each plant manager submits a produc- tion report and a production-cost report. The production report includes the plant manager’s estimate of the percentage of completion of the closing work in progress as to direct materials and conversion costs. Khrishna uses these estimates to calculate the equiva- lent units of work done in each plant and the cost per equivalent unit of work done for both direct materials and conversion costs in each month. Plants are ranked from 1 to 20 in terms of (a) cost per equivalent unit of direct materials and (b) cost per equivalent unit of conversion costs. Each month Khrishna publishes a report that she calls ‘Benchmarking for Efficiency Gains at Manchester Suits’. The top three ranked plants on each category receive a bonus and are written up as the best in their class in the company newsletter.
Khrishna has been pleased with the success of her benchmarking programme. However, she has heard some disturbing news. She has received some unsigned letters stating that two plant managers have been manipulating their monthly estimates of percentage of completion in an attempt to become best in class.
Required
1 How and why might plant managers ‘manipulate’ their monthly estimates of percentage of completion?
2 Khrishna’s first reaction is to contact each plant accountant and discuss the problem raised by the unsigned letters. Is that a good idea?
3 Assume that the plant accountant’s primary reporting responsibility is to the plant man- ager and that each plant accountant receives the telephone call from Khrishna mentioned in requirement 2. What is the ethical responsibility of each plant accountant (a) to Radhika Khrishna and (b) to Manchester Suits in relation to the equivalent unit information each plant provides for the ‘Benchmarking for Efficiency’ report?
4 How might Khrishna gain some insight into whether the equivalent unit figures pro- vided by particular plants are being manipulated?
Solution
Ans 1.
When the plant manager overestimates the percentage of completion of ending work – in – process, the denominator increases resulting in lowering the cost of equivalent unit of material and conversion costs.
The plant Manager can manipulate the percentage of completion cost by the following methods:
- The plant manager may show higher units of material or that the process is at a later stage than what it is at as the conversion rate is higher at the later stages.
- He may show material which needs to be added later in the process as part of the conversion cost.
- The per unit rates of labor, power, etc could be considered at a higher price than what it is actual to increase WIP.
This figure may be manipulated in order to enhance chances of being ranked among the top 3 plants and receive bonus and mention in the company’s newsletter. It may also be done to hide inefficiencies in the process or pilferage occurring in the plant to meet the standards set.
Ans 2
The responsibility for the performance of the plant lies with the plant Manager. Krishna should discuss first with the plant manager as they are responsible for their report. Discussing with a subordinate without verifying the veracity of the claim will impact the authority levels in the plant. He needs to follow the chain of command as if he shows the letter directly to the accountant; it will create a conflict of interest situation and the plant controller may inform the manager regarding the same.
Ans 3.
The plant accountant is an employee of the company and his responsibility is to ensure a timely and accurate supply of information required from them. It is essential that they are not influenced by any other officers including their bosses in conducting their duties as their loyalties lie with the company and no oe else.. As Krishna is a corporate accountant, it is the ethical duty of all plant accountants to co-operate with him irrespective whether they report to the plant manager.
The accountant should be competent and experienced enough to compute the percentage of completion of the closing work in progress as to direct materials and conversion costs.
The plant accountant should check the data and report his figure to Krishna who can then compare the data supplied by Plant manager and accountant and find any discrepancies.
Ans 4
With historical data received from 20 plants, Krishna should work out the standard cost of equivalent Direct material and conversion costs.
The same should than be compared with the data received from each plant for any deviations. Further, a reconciliation of material units from opening inventory to units converted in each process should be made to check for deviations. Very high or low ending Work in process should be examined to determine its accuracy. The conversion cost / unit should be checked for its accuracy.
Krishnan should than visit such plants and audit the figures provided. There could be a case of pilferage of materials and the material conversion ratio should be checked.
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