Benchmarking, ethics. 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 percentage 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 emails 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 rst reaction is to contact each plant controller and discuss the problem raised by the anonymous 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?

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Asked Dec 21, 2019
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  1. Benchmarking, ethics. 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 percentage 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 emails that two plant managers have been manipulating their monthly estimates of percentage of completion in an attempt to obtain the bonus.
  2. Why and how might managers manipulate their monthly estimates of percentage of completion and level of inventory?
  3. McNall’s rst reaction is to contact each plant controller and discuss the problem raised by the anonymous communications. Is that a good idea?
  4. 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?
  5. How might McNall learn whether the data provided by particular plants are being manipulated?
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Expert Answer

Step 1

Since you have posted a question with multiple sub-parts, we will solve first three subparts for you. To get remaining sub-part solved please repost the complete question and mention the sub-parts to be solved.

Under the percentage to completion method- the revenue & cost of long term contracts are recognized as the percent of work completed during a period. This is in line with the matching or accrual concept of accounting. 

Percentage to completion is calculated by = cost to date/ estimated total cost.

Step 2

2. ) Why and how might managers manipulate their monthly estimates of percentage of completion and level of inventory?-

As there is bonus & recognition in newsletter associated with lowest cost per unit, the managers may want to manipulate the numbers to earn bonuses which are directly linked with having lowest cost per equivalent unit for direct materials and conversion costs.

This can be done by making an overestimation  of percantage of completion. As this estimation is in hands of the managers, they may show higher percent of completion, this in turn means overestimation of direct material used & conversion cost charged.  This will increase the equivalent units of inputs and in turn would reduce the cost per unit.  In turn the cost of goods sold would be low as lower calculated cost per unit would be multiplied with the units of goods transferred or completed. This will help plants to achieve lower cost per equivalent unit.  By showing this result, the managers of such plants would become entitled to Bonuses. 

Step 3

3.) McNall’s rst reaction is to contact each plant controller and discuss the problem raised by the anonymous communications. Is that a good idea?

Yes, its a good idea. Plant controllers are the direct personnel who deal with the running of the plant on a daily basis & report the information & work done to plant managers. As plant managers are responsible for preparing the reports for submission and they have complete control ...

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