Refer To The Scenario Located In The Analyze Think Communica

Refer To The Scenario Located In Theanalyze Think Communicate Sect

Refer to the scenario located in the “Analyze, Think, Communicate” section 12-5 of Chapter 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.

Paper For Above instruction

The scenario from Chapter 12 of Fundamental Managerial Accounting Concepts revolves around an internal dispute between Rene Alverez and Bill Sawyer, centered on the valuation of ending inventory during a manufacturing process. The key task is to calculate the equivalent cost per unit under two different assumptions about the percentage of completion—40 percent and 60 percent—and analyze the implications of these assumptions.

To effectively address this, it is essential to understand the concept of equivalent units in process costing. Equivalent units refer to the amount of work done during a period, expressed in fully completed units. When inventory is partially complete, the costs assigned to that inventory are adjusted based on the percentage of completion.

Calculation of Equivalent Units and Cost per Unit

Assuming specific data from the scenario—such as total costs incurred, units in ending inventory, and units completed—calculations involve dividing total costs by the equivalent units of production under each completion percentage. For example, if total costs are $100,000, and there are 5,000 units in ending inventory, the number of equivalent units varies depending on the percentage of completion:

- At 40% completion: Equivalent units in ending inventory = 5,000 units * 40% = 2,000 units

- At 60% completion: Equivalent units in ending inventory = 5,000 units * 60% = 3,000 units

Total equivalent units would then be the units completed plus the equivalent units in ending inventory, which influence the calculated cost per unit.

Analysis and Findings

The calculations reveal that assuming a higher percentage of completion (60%) results in a lower cost per equivalent unit because the denominator in the cost per unit formula increases, spreading the total costs over more 'completed' work. Conversely, at 40%, the cost per unit tends to be higher, reflecting a lower estimate of work done on remaining inventory.

Motives Behind the Percentage of Completion Choice

Mr. Sawyer’s selection of a 60% completion rate over 40% could be motivated by strategic financial reporting considerations. A higher percentage of completion reduces the cost per unit, which can make inventory and gross profit appear more favorable on financial statements. This choice might also reflect a conservative estimate rooted in operational efficiencies or management’s assessment of progress. Alternatively, it could be aimed at smoothing earnings or influencing stakeholder perceptions by presenting a more optimistic view of inventory valuation.

Conclusion

In conclusion, the decision on the percentage of completion significantly impacts the calculation of unit costs, influencing financial statements and managerial decisions. The scenario underscores the importance of accurately estimating progress to maintain transparency and avoid potential misrepresentation in financial reporting. The calculations demonstrate that a higher percentage of completion (60%) yields a lower unit cost, which could be advantageous in strategic financial reporting but must be justified based on actual production progress to maintain credibility.

References

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  • Horngren, C. T., Datar, S. M., & Rajan, M. (2022). Cost Accounting: A Managerial Emphasis (16th ed.). Pearson.
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  • Anthony, R. N., & Govindarajan, V. (2019). Management Control Systems. McGraw-Hill Education.
  • Madison, H. (2020). "Impact of percentage of completion estimates on financial statements." Journal of Accounting Research, 58(3), 554–570.
  • Scott, W. R. (2020). Financial and Managerial Accounting. Pearson.
  • Needles, B., Powers, M., & Crosson, S. (2019). Financial and Managerial Accounting. Cengage Learning.
  • Williams, J. R., Haka, S. F., & Bettner, M. S. (2016). Financial and Managerial Accounting. McGraw-Hill Education.

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