Margaret Major is the corporate controller of Leisure Suits. Leisure Suits has 20 plants worldwide that manufacture basic suits for retail stores. Each plant uses a process-costing system. At the end of each month, each plant manager submits a production report and a production cost report. The production report includes the plant manager’s estimate of the percentage of completion of the ending work in process as to direct materials and conversion costs. Major uses these estimates to compute the equivalent units of work done in each plant and the cost per equivalent unit of work done for both direct materials and conversion costs in each month. Plants are ranked from 1 to 20 in terms of (a) cost per equivalent unit of direct materials and (b) cost per equivalent unit of conversion costs. Each month, Major publishes a report that she calls “Benchmarking for Efficiency Gains at Leisure Suits.” The three top-ranked plants on each category receive a bonus and are written up as the best in their class in the company newsletter. Major has been pleased with the success of her benchmarking program. However, she has heard some disturbing news. She has received some unsigned letters stating that two plant managers have been manipulating their monthly estimates of percentage of completion in an attempt to obtain “best in class” status.
REQUIRED
1. How and why might plant managers “manipulate” their monthly estimates of percentage of completion?
2. Major’s first instinct is to contact each plant controller and discuss the problem raised by the unsigned letters. Is that a good idea?
3. Assume that the plant controller’s primary reporting responsibility is to the plant manager and that each plant controller receives the phone call from Major mentioned in requirement 2. What is the ethical responsibility of each plant controller (a) to Margaret Major and (b) to Leisure Suits in relation to the equivalent unit information each plant provides for the “Benchmarking for Efficiency” report?
4. How might Major gain some insight into whether the equivalent-unit figures provided by particular plants are being manipulated?