Why and how might managers manipulate their monthly estimates of percentage of completion and level of inventory?
Amanda McNall is the corporate controller of Scott Quarry. Scott Quarry operates 12 rock-crushing plants in Scott County, Kentucky, that process huge chunks of limestone rock extracted from underground mines.
Given the competitive landscape for pricing, Scott’s managers pay close attention to costs. Each plant uses a process-costing system, and at the end of every quarter, each plant manager submits a production report and a production-cost report. The production report includes the plant manager’s estimate of the per- centage of completion of the ending work in process as to direct materials and conversion costs, as well as the level of processed limestone inventory. McNall uses these estimates to compute the cost per equivalent unit of work done for each input for the quarter. Plants are ranked from 1 to 12, and the three plants with the lowest cost per equivalent unit for direct materials and conversion costs are each given a bonus and recognized in the company newsletter.
McNall has been pleased with the success of her benchmarking program. However, she has recently received anonymous e-mails that two plant managers have been manipulating their monthly estimates of percentage of completion in an attempt to obtain the bonus.
- Why and how might managers manipulate their monthly estimates of percentage of completion and level of inventory?
- McNall’s first reaction is to contact each plant controller and discuss the problem raised by the anony- mous communications. Is that a good idea?
- Assume that each plant controller’s primary reporting responsibility is to the plant manager and that each plant controller receives the phone call from McNall mentioned in requirement 2. What is the ethical responsibility of each plant controller (a) to Amanda McNall and (b) to Scott Quarry in relation to the equivalent-unit and inventory information each plant provides?
- How might McNall learn whether the data provided by particular plants are being manipulated?
