Percentage of Completion Case Study and Activity

Percentage of Completion Case Study and Activity

Compute the equivalent cost per unit, assuming the ending inventory is considered to be 40 percent complete.

Ending Inventory at 40%
		Opening WIP	Started and Completed in Same Financial Year	Closing WIP
Number of Units		5,500	94,500	10,000
Degree of Competition		100%	100%	40%
Equivalent Units		5,500	84,500	4,000
Total Equivalent Units	94,000
Total Cost	902,400
Cost per Equivalent Unit	9.60

Compute the equivalent cost per unit, assuming the ending inventory is considered to be 60 percent complete.

Ending Inventory at 60%
		Opening WIP	Started and Completed in Same Financial Year	Closing WIP
Number of Units		5,500	94,500	10,000
Degree of Competition		100%	100%	60%
Equivalent Units		5,500	84,500	6,000
Total Equivalent Units	96,000
Total Cost	902,400
Cost per Equivalent Unit	9.40

Summary of Calculations and Findings

Mr. Sawyer is one of the highly respected individuals in the organization. In each of the respective three years, he has been able to manage the entire department and the cost per unit of production. However, there is a decrease in the work of the process inventory. There is a high assumption that he is the most suitable successor of the plant. If he can perform well in another extra year, he will quickly seal the deal of taking over the plant manager’s position. The target cost per unit, which is also the value of the organization’s standards, is $9.45 for a single unit.

If the closing inventory is established at 40% complete, then the cost per single unit equivalent is $9.6. If a comparison is made with the standard value, is it much higher? Therefore, it is not the most effective strategy to follow. It will harm Mr. Sawyer’s reputation as he will not be able to get the plant manager position. It will be a hindrance to his promotion plan. Hence, there is a need to consider the option of 60% valuation to yield the anticipated outcomes both in the short- and long-run.

If the closing inventory is established at 60% complete, then the cost per single unit equivalent will be $9.4. If a comparison is made with the set standard for the organization, the value is much lower. That implies that it is an adequate inventory to consider since it will yield the anticipated outcomes. Mr. Sawyer’s reputation will be maintained, and there is a high chance that he will get the needed promotion to oversee the operations of the plant. A comparison between the inventory’s 40% and 60% valuation indicated a need to consider the most effective based on the set objective.

In conclusion, it will be more effective for Mr. Sawyer to end the inventory at 60% and not 40%. A shift in the valuation will result in a change in the target. The first step is to set the target to be achieved and then compare it with action. The approach is very effective in the decision-making process. The method allows the executive team to evaluate employees’ performance levels.

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Percentage of Completion Case Study and Activity

René Alverez knew she was in over her head soon after she took the job. Even so, the opportunity for promotion comes along rarely and she believed that she would grow into it. Ms. Alverez is the cost accounting specialist assigned to the finishing department of Standard Tool Company. Bill Sawyer, the manager of the finishing department, knows exactly what he is doing. In each of the three years he has managed the department, the cost per unit of product transferred out of his Work in Process Inventory account has declined. His ability to control cost is highly valued, and it is widely believed that he will be the successor to the plant manager, who is

being promoted to manufacturing vice president. One more good year would surely seal the deal for Mr. Sawyer. It was little wonder that Ms. Alverez was uncomfortable in challenging Mr. Sawyer’s estimate of the percentage of completion of the department’s ending inventory. He contended that the inventory was 60 percent complete, but she believed that it was only about 40 percent complete.

After a brief altercation, Ms. Alverez agreed to sign off on Mr. Sawyer’s estimate. The truth was that although she believed she was right, she did not know how to support her position. Besides, Mr. Sawyer was about to be named plant manager, and she felt it unwise to challenge such an important person.

The department had beginning inventory of 5,500 units of product and it started 94,500 units during the period. It transferred out 90,000 units during the period. Total transferred-in and production cost for the period was $902,400. This amount included the cost in beginning inventory plus additional costs incurred during the period. The target (standard) cost per unit is $9.45.

Read the scenario 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.