Danielle Bazinet and Annadine Lue are the plant managers for Pacific Lumber’s particle board division. Pacific Lumber has adopted a JIT management philosophy. Each plant combines wood chips with chemical adhesives to produce particle board to order, and all production is sold as soon as it is completed. Din Nguyen is Pacific Lumber’s regional controller. All of Pacific Lumber’s plants and divisions send Nguyen their production and cost information. While reviewing the numbers of the two particle board plants, he is surprised that both plants estimate their ending work in process inventories at 80% complete, which is higher than usual. Nguyen calls Lue, whom he has known for some time. She admits that to ensure that their division met its profit goal and that both she and Bazinet would make their bonus (which is based on division profit), she and Bazinet agreed to inflate the percentage completion. Lue explains, “Determining the percentage completion always requires judgment. Whatever the percentage completion, we will finish the work in process inventory first thing next year.”
Requirements
1. How would inflating the percentage completion of ending work in process inventory help
Bazinet and Lue get their bonus?
2. The particle board division is the largest of Pacific Lumber’s divisions. If Nguyen does not correct the percentage completion of this year’s ending work in process inventory, how will the misstatement affect Pacific Lumber’s financial statements?
3. Evaluate Lue’s justification, including the effect, if any, on next year’s financial statements.
4. In considering what Nguyen should do, answer the following questions:
a. What is the ethical question?
b. What are the options?
c. What are the possible consequences?
d. What should Nguyen do?