Rene Alverez Knew She Was In Over Her Head

Rene Alverez Knew She Was In Over Her Head On As Soon As She Took The

Rene Alverez, a cost accounting specialist at Standard Tool Company, faced significant ethical and managerial challenges during her tenure in the finishing department. Tasked with evaluating the percentage of completion of inventory, she encountered conflicting assessments with her supervisor, Bill Sawyer. Sawyer estimated the department’s ending inventory to be 60 percent complete, while Alverez believed it was only about 40 percent. This discrepancy raised questions about managerial motives, ethical responsibilities, and the influence of organizational pressures on decision-making processes. This paper explores the technical accounting aspects of her situation, ethical considerations, and behavioral factors shaping her decisions, all within the context of professional standards and fraud risk.

Paper For Above instruction

In cost accounting, determining the correct equivalent cost per unit is crucial for accurate inventory valuation, cost control, and financial reporting. The calculation hinges significantly on the estimated percentage of completion of inventory at period-end, representing the proportion of manufacturing costs incurred relative to the total estimated costs. The choice of percentage—whether 40 percent or 60 percent—can materially influence perceived production costs, profit reporting, and managerial judgments.

Calculations of Equivalent Cost Per Unit

Given the data, the total units in production include beginning inventory of 5,500 units and 94,500 units started during the period, totaling 100,000 units. Assuming the beginning inventory is fully completed in the current period, total units to account for are 100,000. The target (standard) cost per unit is $59.45, which forms the basis for evaluating the total costs involved. To calculate the equivalent cost per unit, we need to determine the total costs assigned to the ending inventory, adjusted by the estimated percentage of completion, then sum with the costs of units transferred out.

Part A: Equivalent cost per unit, assuming 40 percent completion

At 40 percent completion, the ending inventory is valued at 40 percent of the standard cost. The units remaining in ending inventory are the difference between units started and units transferred out. Assuming all units are processed uniformly, the cost for ending inventory becomes:

Ending inventory units = 94,500 units started - Units transferred out = 94,500 units (assuming all units are transferred except ending inventory).

Equivalent units for ending inventory = 40% of 94,500 = 37,800 units.

The total cost of ending inventory = 37,800 units × $59.45 ≈ $2,253,810.

Similarly, the cost of units transferred out includes all units fully completed, corresponding to the total units less ending inventory units. The equivalent cost per unit, considering the weighted average approach, combines the costs of completed goods and the valuation of ending inventory.

Part B: Equivalent cost per unit, assuming 60 percent completion

In this case, the ending inventory is valued at 60 percent completion. The equivalent units for ending inventory are:

60% of 94,500 units = 56,700 units.

The total cost of ending inventory = 56,700 × $59.45 ≈ $3,374,865.

Again, this affects the calculation of per-unit costs, with higher estimated completion leading to higher inventory valuation, influencing profit margins and managerial decisions.

Analysis of Mr. Sawyer’s Estimation Motives

Mr. Sawyer’s choice to set the percentage of completion at 60 percent, higher than Alverez’s estimate of 40 percent, appears strategic. This inflation of the completion percentage reduces the recognized cost of inventory, thereby increasing the reported gross profit. It is plausible that Sawyer aimed to present the department in a more favorable light, potentially to secure his promotion, as management often rewards positive financial reports. Such motives suggest considerations beyond simple accounting accuracy, possibly driven by performance pressure and personal ambition, highlighting the ethical dilemma faced by Alverez.

Professional Ethical Considerations

If Ms. Alverez is a certified management accountant, her decision to disclose her disagreement with Mr. Sawyer entails ethical considerations of confidentiality. According to the standards of ethical professional practice (Exhibit 1.17), certified accountants are obligated to uphold integrity and objectivity, which may necessitate whistleblowing if unethical conduct jeopardizes stakeholder interests.

However, disclosing internal disagreements must be balanced against confidentiality obligations. If Alverez believed that Sawyer’s estimate was intentionally manipulated for personal gain or misrepresenting financial health, reporting to higher management or the chief accountant might be justified ethically, provided the disclosure aligns with the organization’s whistleblowing policies and professional standards.

Ethical Violations and Standards

Ms. Alverez may have violated ethical standards if she knowingly allowed inaccurate inventory valuation or failed to challenge quantifiable misinformation. Failing to confront or report suspected manipulation might breach integrity and objectivity principles if her silence permits misleading financial statements. Conversely, her reluctance to challenge Sawyer’s authority reflects the organizational pressures that can compromise ethical conduct.

The Fraud Triangle and Behavioral Influences

The fraud triangle comprises three elements: opportunity, pressure, and rationalization. In Ms. Alverez’s case, opportunity arises from her position and the unchallenged estimation process. Pressure stems from the potential consequences of challenging Sawyer, including negative repercussions for her career. Rationalization involves her belief that she lacks sufficient support or authority to contest the estimation confidently. The organizational culture emphasizing department performance and managerial advancement fosters an environment susceptible to ethical lapses, influencing her behavior. Recognizing these elements underscores the importance of ethical vigilance and organizational controls to prevent fraudulent practices.

Conclusion

The decision regarding inventory percentage of completion carries both technical and ethical implications. While technical calculations demonstrate how estimates influence financial reporting, ethical considerations highlight the importance of integrity, objectivity, and whistleblower protections. Organizational pressures and the fraud triangle elements contribute significantly to ethical dilemmas faced by professionals like Ms. Alverez. Cultivating a culture of transparency and reinforcing professional standards are vital to mitigating such risks and ensuring accurate, honest financial reporting.

References

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  • CMA Canada. (2017). Ethics standards of CMA Canada (Exhibit 1.17, Chapter 1). Retrieved from https://www.cma.ca
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