The production manager of Colossal Furniture, Mr. Mammoth, will receive a bonus if the company records a profit of $10,000 in November. The company uses a hybrid accounting system for its production of high chairs for oversized infants. Mr. Mammoth has control over the percentage of completion for units in process in the process costing portion of the cost accounting system.
The actual percentage of completion for units in process is 42%, but Mr. Mammoth calculates that if he authorizes a change to 45% completion, this will cause a higher allocation of costs to work in process, and thereby increases profits just enough to earn him the bonus.
The cost accounting manager is not aware of the bonus situation, and does not complain about what appears to be a minor increase in the percentage of completion. Mr. Mammoth receives his bonus.