Reference no: EM131761807

Imagine you are the accounting controller at High Mountain Lumber. Your company combines wood chips with chemical adhesives to produce particle board. This process is started in the Mixing Department and then completed in the Finishing Department.

You are reviewing the Cost Production Report for the Mixing Department. You are surprised to see that Work-In-Process Inventory for the Mixing Department is estimated at 75% complete, which is higher than usual. Most months it about 30% complete.

You email Joe Smith, the Mixing Department Plant Manager to ask about this large increase. He admits that to ensure his division met their annual profit goal, he inflated the ending WIP Inventory percentage of completion. Joe explains, "Determining the percent complete is just an estimate each month anyway. We'll just do a little extra work to finish the Work-in-Process Mixing Inventory first thing next year. It is no big deal. This way we can keep the department's costs. Now, our hardworking employees will get a well-deserved Christmas bonus."
As the controller, you know that by inflating the percentage of completion for the work in process is just the start of a long number of errors this Joe's change has caused.

Because ending WIP Inventory for the Mixing Department has been falsely inflated, lower costs have now also been assigned to the WIP-Finishing Department and Finished Goods Inventory.

Joe's change also had his desired impact lower the company's annual Cost of Goods Sold.

You think Joe had good intentions to reward his employees for hard work. This is a delicate situation. What should you do?

Write an email response to Joe.

Be sure to include the following:
A meaningful subject line (10%)
Proper email format (with a greeting and signature) (10%)
Use appropriate business communication spelling and grammar (10%)
Use a professional and polite tone (10%)

Also include appropriate accounting terminology and reasoning in your response (60%):

How this will impact High Mountain Lumber's financial statements?

Suggested accounts and statements to think about:

Balance Sheet for this year and next year.

WIP-Mixing Inventory, WIP-Finishing Inventory

Finished Goods Inventory

Retained Earnings

The Income Statement

Cost of Goods Sold

Gross Profit

Operating/Net Income)

Potential consequences of Joe's change.