Percentage Completion

Percentage Completion

Compute the equivalent cost per unit, assuming the ending inventory is 40 per cent complete.

Ending inventory = $902,400/$9.45 = (95,492 – 5, 500) units = $89,992

The number of units if the ending inventory is considered 40% = (89,992 ×

100)/ 40 = 224,980 units

Cost per unit if the ending inventory is considered 40% = The cost of the new number of units / Ending inventory

$224,980/90,000 = $2.50

Cost per unit = $2.50

Compute the equivalent cost per unit, assuming the ending inventory is 60 per cent complete.

Accumulated cost if the ending inventory is considered 60% = (89,992 × 100)/60 = $149,986

Cost of units if the ending inventory is considered 60% = $149,986/90,000 = $1.67

Cost per unit = $1.67

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Summary

Based on the findings, Mr. Sawyer’s overstating ending inventory directly impacts the cost of units sold. Notably, the cost of units sold was $224,980 when the inventory cost is considered 40% and $149,986 when the inventory cost is considered. Here, the current year’s overstatement of the ending inventory caused the Cost of Goods Sold (COGS) to appear lower than it is – $149,986 compared with $224,980. This manipulation will affect the company’s net income since it is directly related to the COGS. The net effect will increase the firm’s tax liability, eventually hurting its profitability. These findings imply that inventory fraud can influence a company’s profit and loss.

Motives for Mr. Sawyer’s fraud 

Several motives could be behind Mr. Sawyer’s establishing the percentage of inventory completion at 60% rather than 40%. One of these is the pressure to meet the target. Usually, some firms’ performance determines bonuses and incentives (Edmonds et al., 2011). This situation could have motivated Mr. Sawyer to manipulate the inventory results to meet incentives. Another reason behind the fraud could be that Mr. Sawyer is taking advantage of the firm’s lack of an internal fraud monitoring system. Additionally, external factors could influence Mr. Sawyer’s actions, such as living beyond his means, alcohol problems, or external pressure to steal from the company (Edmonds et al., 2011). Therefore, from an ethical practice standpoint, Mr. Sawyer failed the principles and values that guide accounting practices, including integrity, competence, and credibility.

References

Edmonds, T., Tsay, B., & Olds, P. (2011). Fundamental managerial accounting concepts (6th ed.). McGraw-Hill Irwin.

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

Read the scenario in the textbook and complete the activity below.

Compute the equivalent cost per unit, assuming the ending inventory is 40 per cent complete.

Compute the equivalent cost per unit, assuming the ending inventory is 60 per cent complete.

Write a 350-word summary of your calculations and findings. Comment on Mr Sawyer’s motives for establishing the completion percentage at 60 per cent rather than 40 per cent.