Chapter 7—The Conversion Cycle TRUE/FALSE
1. The philosoph philosophy y of customer customer satisfacti satisfaction on permeates permeates the world-cl world-class ass firm. firm. ANS: T 2. Reports generated generated by the cost cost accounting accounting system system include performance reports reports and budget reports. reports. ANS: T . The cost account accounting ing system system authori!es authori!es the release release of raw materials materials into into productio production. n. ANS: " #. $atch processing processing creates a homogeneous homogeneous product product through a continuous continuous series series of standard procedures. ANS: " %. The bill of materials specifies the the types and &uantities &uantities of the the raw materials materials and subassemblies subassemblies used used in producing a single single unit of finished product. product. ANS: T '. A purchase re&uisition re&uisition authori!es authori!es the store(eeper to release materials to indi)iduals indi)iduals or wor( wor( centers in the production process. ANS: " *. The SA+ R, system system organi!es organi!es business business processes processes into four categories: categories: financial financial logistics logistics human resources and business process support. ANS: T . The ob/ecti)e ob/ecti)e of the 0conomic rder rder uantity model is to reduce total in)entory in)entory costs by minimi!ing carrying costs and ordering costs. ANS: T 3. The wor(-in-p wor(-in-proces rocesss file is the subsidiary subsidiary ledger ledger for the wor(-in-proc wor(-in-process ess control control account. account. ANS: T 14. 5o)e tic(ets tic(ets authori authori!e !e the store(eep store(eeper er to release release materials materials to wor( centers. centers. ANS: " 11. An operating characteristic of of modern manufacturing manufacturing firms is that labor is replaced with with capital so that the firm can be more efficient and therefore more competiti)e.
ANS: T 12. 6omputer 7ntegrated 5anufacturing focuses on reducing the comple8ity of the physical manufacturing layout of the shop floor. ANS: " 1. The only ob/ecti)e of the 9ust-7n-Time philosophy is to reduce in)entory le)els. ANS: " 1#. Accounting in a world-class manufacturing en)ironment emphasi!es standard cost and )ariance analysis. ANS: " 1%. 7dentifying cost dri)ers is an essential step in implementing the 9ust-7n-Time philosophy. ANS: " 1'. A world class information system produces )ery little paper. ANS: T 1*. 7nternal control procedures are )irtually identical in a world-class manufacturing en)ironment and in a traditional manufacturing en)ironment. ANS: " 1. 7n a world-class company all acti)ities from ac&uisition of raw materials to selling the final product form a chain of customers.; ANS: T 13. The two subsystems of a traditional con)ersion cycle are the production system and the deli)ery system. ANS: " 24. 5anufacturing resources planning <5R+ 77= has e)ol)ed into electronic resource planning <0R+=. ANS: " MULTIPLE CHICE
1. >hich item does not describe a world-class company? a the goal of a world-class company is to delight its customers . b customers in a world-class company are e8ternal departments only . c world-class companies wor( in cross-functional teams .
d a world-class company has a flat organi!ational structure .
ANS: $ 2. >hich subsystem is not a part of the production system? a directing the mo)ement of wor( through the process . b determining raw material re&uirements . c authori!ing wor( to be performed . d monitoring the flow of cost information related to production .
ANS: @ . The purpose of the cost accounting system is to a produce information for in)entory )aluation . b authori!e release of raw materials . c direct the mo)ement of wor(-in-process . d determine material re&uirements .
ANS: A #. >hich process creates a homogeneous product through a continuous series of standard procedures? a batch process . b ma(e-to-order process . c continuous process . d none of the abo)e .
ANS: 6 %. An e8ample of a continuous process is the production of a wedding in)itations . b mil( products . c /et aircraft .
d all of the abo)e .
ANS: $ '. All of the following are characteristics of batch processing e8cept a each item in the batch is similar . b batches are produced in accordance with detailed customer specifications . c batches are produced to replenish depleted in)entory le)els . d setting up and retooling is re&uired for different batches .
ANS: $ *. >hen determining which items to produce a firm must (now a last years production le)el . b raw material in)entory le)els . c the standard cost of the item . d the sales forecast .
ANS: @ . The production schedule is a the e8pected demand for the firms finished goods for a gi)en year . b the formal plan and authority to begin production . c a description of the type and &uantity of raw materials and subassemblies used to . produce a single unit of finished product d the se&uence of operations during manufacturing .
ANS: $ 3. A mo)e tic(et a is the formal plan and authority to begin production . b specifies the materials and production re&uired for each batch . c records the wor( done in each wor( center .
d authori!es the store(eeper to release materials to wor( centers .
ANS: 6 14. The internal control significance of the e8cess materials re&uisition is that it a indicates the amount of material released to wor( centers . b identifies materials used in production that e8ceed the standard amount allowed . c indicates the standard &uantities re&uired for production . d documents the return to raw materials in)entory of unused production materials .
ANS: $ 11. 7n)entory control performs all of the following tas(s e8cept it a pro)ides production planning and control with the in)entory status report of finished . goods b updates the raw material in)entory records . c prepares a materials re&uisition for each production batch . d records the completed production as an increase to finished goods in)entory .
ANS: 6 12. The store(eeper releases raw materials based on the a production schedule . b materials re&uisition . c wor( order . d bill of materials .
ANS: $ 1. >hich of the following is not an assumption of the 0conomic rder uantity model? a demand for the product is (nown with certainty . b total cost per year of placing orders is fi8ed . c lead time is (nown and is constant .
d there are no &uantity discounts .
ANS: $ 1#. "irms hold safety stoc( to compensate for a mathematical wea(nesses of the 0conomic rder uantity model . b )ariations in lead time or daily demand . c fluctuations in carrying costs . d uncertainty in the estimation of ordering costs .
ANS: $ 1%. >hat is the economic order &uantity if the annual demand is 14444 units set up cost of placing each order is B and the holding cost per unit per year is B2? a 1*# . b 12 . c 2#% . d none of the abo)e .
ANS: A 1'. 7f the daily demand is #4 units and the lead time is 12 days the reorder point is a %2 units . b # units . c #4 units . d none of the abo)e .
ANS: 6 1*. >hich statement is not correct? a general ledger creates a new cost record upon receipt of a wor( order from production . planning and control b cost accounting updates the cost record with data gathered from the materials re&uisition . c general ledger posts summary information about the manufacturing process based on a
. /ournal )oucher prepared by cost accounting d cost accounting computes )ariances and applies o)erhead to indi)idual cost records .
ANS: A 1. >hich of the following is not a category of critical success factors in most manufacturing companies? a product &uality . b customer ser)ice . c re)enue generation . d resource management .
ANS: 6 13. 6omputer integrated manufacturing groups all of the following technologies e8cept a robotics . b materials re&uirements planning . c automated storage and retrie)al systems . d computer aided design .
ANS: $ 24. The SA+ R, system pro)ides pre-defined modules to support business processes in the all of the following categories e8cept a human resources . b business process support . c strategic . d financial .
ANS: 6 21. >hich situation )iolates the segregation of functions control procedure? a production planning and control is located apart from the wor( centers . b in)entory control maintains custody of in)entory items .
c cost accounting has custody of and ma(es entries on cost records . d wor( centers record direct labor on /ob tic(ets .
ANS: $ 22. All of the following are internal control procedures that should be in place in the con)ersion cycle e8cept a calculation and analysis of direct material and direct labor )ariances . b retention of e8cess materials by wor( centers . c physical count of in)entory items on hand . d limited access to raw material and finished goods in)entories .
ANS: $ 2. +rocess simplification focuses on a using 6omputer Numerical 6ontrolled machines which stand alone within a traditional . setting b completely automating the manufacturing en)ironment . c reducing the comple8ity of the physical manufacturing layout of the shop floor . d organi!ing the process into functional departments .
ANS: 6 2#. A manufacturing process that is organi!ed into group technology cells utili!ing no human labor is called a islands of technology . b process simplification . c 6omputer 7ntegrated 5anufacturing . d traditional manufacturing .
ANS: 6 2%. An e8ample of automation of manufacturing design is a 6omputer Aided 0ngineering .
b Automated Storage and Retrie)al Systems . c 6omputer Numerical 6ontrol . d robotics .
ANS: A 2'. An e8ample of automation of manufacturing planning is a 6omputer Aided 0ngineering . b Automated Storage and Retrie)al Systems . c 5aterials Re&uirements +lanning . d 6omputer Numerical 6ontrol .
ANS: 6 2*. "irms implement a 9ust-7n-Time in)entory approach to a reduce in)estment in in)entories . b determine the optimum in)entory le)el using the 0 model . c camouflage production problems . d ensure o)erproduction of in)entory .
ANS: A 2. 6haracteristics of 9ust-7n-Time manufacturing include all of the following e8cept a push manufacturing . b !ero defects . c reduced setup time and small lot si!es . d reliable )endors .
ANS: A 23. The cost of poor &uality includes all of the following e8cept a cost of rewor( .
b warranty claims . c scheduling delays . d proceeds from the sale of scrap .
ANS: @ 4. A fle8ible manufacturing system a creates bottlenec(s in the process . b leads to an us; )ersus them; attitude among wor(ers . c shortens the physical distance between acti)ities . d is organi!ed along functional lines .
ANS: 6 1. @eficiencies of the traditional cost accounting information system include all of the following e8cept a an emphasis on financial performance . b inaccurate cost allocations . c an emphasis on standard costs . d immediate feedbac( about de)iations from the norm .
ANS: @ 2. >hich statement is not correct? a an acti)ity dri)er is a means to measure the acti)ity used by the cost ob/ect . b cost ob/ect describes the wor( performed in a firm . c acti)ities cause costs . d cost ob/ects create a demand for acti)ities .
ANS: $ . "irms are adopting Acti)ity $ased 6osting
b . c . d .
it more accurately allocates costs to products it recogni!es the importance of direct labor as a component of total manufacturing cost the financial nature of the reports permits comparisons to be made among different types of products
ANS: $ #. 7n a . b . c . d .
traditional firms information reporting pro)ides financially oriented information relating to operations presents detailed information about acti)ities shows the allocation of costs first to acti)ities and then to cost ob/ects identifies nonessential acti)ities
ANS: A %. Types of information pro)ided by Acti)ity $ased 6osting include a a description of the single acti)ity dri)er used for o)erhead application . b the dollar )alue of the direct material usage )ariance . c identification of cost dri)ers . d details of the components of the single o)erhead cost pool .
ANS: 6 '. >hich statement is not correct? a the benchmar( approach compares (ey acti)ities with similar acti)ities in other firms . b critical success factors include product and process &uality . c the A$6 model includes two perspecti)es: an allocation of cost perspecti)e and a process . perspecti)e d in world-class manufacturing firms &uality control acti)ities at the end of the process are . essential
ANS: @ *. All of the following are documents in batch process production systems e8cept a production schedule .
b route sheet . c materials re&uisition . d purchase order .
ANS: @ . Transaction authori!ation occurs in a traditional manufacturing en)ironment in all of the following ways e8cept a production planning and control initiates production with a wor( order . b mo)ement of the wor( through the production process follows the mo)e tic(et . c the sales department modifies wor( orders to match changes in demand . d the materials re&uisition authori!es the store(eeper to release materials to the wor( . centers
ANS: 6 3. 5anufacturing fle8ibility incorporates four characteristics. These include all of the following e8cept a high product &uality . b high in)entory le)els . c automation of manufacturing processes . d physical reorgani!ation of production facilities .
ANS: $ #4. The stages of the automation continuum are
ANS: 6 SHRT A!S"ER
1. >hich type of manufacturing creates a homogeneous product through a continuous series of standard procedures? ANS: continuous process manufacturing 2. >hat information is contained in the bill of materials <$5=? ANS: The $5 specifies the types and &uantities of raw materials and subassemblies used in producing a single unit of finished product. . >hat is the difference between a materials re&uisition and a purchase re&uisition? ANS: A materials re&uisition authori!es the store(eeper to release materials and subassemblies to the production process. A purchase re&uisition authori!es the purchasing department to place an order with an e8ternal )endor to ac&uire goods or ser)ices. #. Cist one authori!ation control in the traditional manufacturing en)ironment. ANS: wor( orders prepared by production planning and controlD mo)e tic(ets signed by the foremanD materials re&uisitions and e8cess materials re&uisitions %. 08plain how 9ust-7n-Time in)entory affects setup time and lot si!e. ANS: 7n a 9ust-7n-Time process setup time should be reduced as much as possible ideally to !ero and lot si!es should be )ery small to ensure a continuous flow of product through the process. '. >hat is one benefit of the fle8ible production system? ANS: A fle8ible production system shortens the physical distance between acti)ities reducing setup time processing time handling costs and in)entories. *. Cist two disad)antages of using a traditional cost accounting system. ANS: 6ost allocations may be inaccurateD there is a time lag in reportingD information is reported in financial termsD there is an emphasis on standard cost. . 7n Acti)ity $ased 6osting what is the term used to refer to the wor( performed by a firm? ANS: an acti)ity 3. 7n Acti)ity $ased 6osting the acti)ity cost is assigned to the cost ob/ect by means of EEEEEEEEEEEEEEEEEEEEEEEEEE. ANS:
an acti)ity hen a process is benchmar(ed (ey acti)ities are compared to similar acti)ities performed elsewhere in the firm or in other firms. 11. +ro)ide a specific e8ample of source data automation. ANS: bar coding magnetic in( character recognition electronic strip optical character recognition 12. 7n a traditional manufacturing en)ironment cost accounting pro)ides independent )erification of what information? >hat are the benefits? ANS: 6ost accounting reconciles materials and labor usage from the materials re&uisitions and /ob tic(ets with prescribed standards and identifies significant departures. Such )ariance analysis is important for control of the manufacturing process. 1. Fow are cost structures fundamentally different between the traditional and 675 en)ironments? ANS: 7n the traditional manufacturing en)ironment direct labor is a much larger component of total manufacturing costs than in the 675 en)ironment. )erhead on the other hand is a far more significant element of cost in ad)anced technology manufacturing. 1#. >hat are the (ey segregation of duties issues in the con)ersion cycle? ANS: 7n)entory control must be separated from raw materials and finished goods custody. 6ost accounting must be separate from the wor( centers. General ledger must be separate from other accounting functions. 1%. Traditional accounting assumes that products cause costs. A$6 assumes that EEEEEEEEEEEEEEEEE cause costs. ANS: acti)ities 1'. @ifferentiate between essential and non-essential acti)ities. ANS: 0ssential acti)ities add )alue to the organi!ation either through adding )alue to the customer or to the organi!ation. Non-essential acti)ities do not add )alue. 1*. Name the underlying assumptions of the 97T method. ANS: Hero defects !ero setups small lot si!es !ero in)entories !ero lead times I reliable )endors and team attitude.
1. >hat document signals the completion of the production process? ANS: The receipt by cost accounting of the last mo)e tic(et for a batch from the wor( center signals the completion of the production process. 13. >hat document triggers the beginning of the cost accounting process for a gi)en production run? ANS: The wor( order from the production planning and control department triggers the cost accounting process. 24. Name fi)e documents associated with batch production systems. ANS: Sales forecast production schedule bill of materials route sheet wor( order mo)e tic(et and materials re&uisition. ESSA#
1. >hat are the accounting implications when a firm mo)es toward world-class status? ANS: >hen a firm mo)es toward world-class status changes will be re&uired in accounting techni&ues in information reporting and in the integration of the information system. >orld-class companies will apply accounting techni&ues li(e Acti)ity $ased 6osting to obtain impro)ed cost information in order to ma(e better decisions concerning pricing product mi8 and product and process design. 7nformation will be de)eloped to help managers understand and e)aluate manufacturing acti)ities identify and eliminate nonessential acti)ities identify cost dri)ers and establish lin(s between performance measures and decision ma(ing. "inally firms will implement information systems that integrate financial and nonfinancial information using software li(e the 5anufacturing Resource +lanning 77. "irms will maintain an electronic lin( with e8ternal parties by implementing 0lectronic @ata 7nterchange <0@7=. 2. 6ontrast the treatment of in)entories in the traditional manufacturing en)ironment and the world-class manufacturing en)ironment. ANS: 7n the traditional manufacturing en)ironment in)entories are used to reduce or eliminate bac( orders. The goal in the traditional en)ironment is to minimi!e the cost of holding in)entory and the costs of ordering or manufacturing in)entory. 7n a world-class manufacturing en)ironment the 9ust-7n-Time <97T= in)entory system is often implemented. 7n)entories are (ept to the absolute minimum. 7n)entories arri)e in small &uantities from )endors se)eral times per day. 7n)entory is pulled; through the manufacturing processD there are no batches of partially completed products throughout the production process. The 97T in)entory concept assumes: !ero defects !ero setup time small lot si!es !ero in)entories !ero lead time and reliable )endors.
. @iscuss the (ey segregation of duties that should e8ist in the traditional manufacturing en)ironment. ANS: +roduction planning and control should be separate from the wor( centers. 7n)entory control which maintains accounting records for raw materials hat are the four categories of business processes as defined as modules by SA+ R,? 08plain. ANS: "inancial: The financial modules include the financial accounting module that collects financial data for both internal and e8ternal reporting the controlling module for reporting and controlling costs the fi8ed asset management module that supports the management of fi8ed leased and real corporate assets and the ability to respond to interacti)e re&uests. Cogistics: The logistics modules support manufacturing by means of an a)ailable-to-promise module to respond to customer in&uiries sales and distribution module to handle order entry and order status a product planning module for forecasting and additional modules for materials management ser)ice calls and plant maintenance. Fuman resources: This module supports management of employees including hiring wor( scheduling and payroll processing. $usiness process support: Two types of modules handle wor(flow and industry specific acti)ities. %. Fow can a world-class information system yield a paperless en)ironment? ANS: Traditional paper flow can be essentially eliminated in a world-class information system en)ironment. Sa)ings occur by eliminating printing handling filing of paper documents and data entry errors. +art of the benefit comes from source data automation using technologies such as bar coding
+roduct &uality: The firms product must meet or e8ceed the customers e8pectations. +rocess &uality: The amount of process )ariation that results in scrap or rewor( must be minimi!ed. 6ustomer ser)ice: The demands of customers for finished products must be met. Resource management: The firm must ma8imi!e the use of all resources in manufacturing. "le8ibility: The firm must be willing to ad/ust to changes in demands in its en)ironment. . 5R+ 77 integrates product design and the production process with order entry accounting. and acti)ity based costing. >hat are some of the benefits? ANS: The benefits include: impro)ed customer ser)ice reduced in)entory in)estment increased producti)ity impro)ed cash flow assistance in achie)ing long-term strategic goals help in managing changes and fle8ibility in the production process. 3. The 9ust-7n-Time <97T= approach to in)entories is regarded as a great ad)ance in in)entory management. There are si8 assumptions that underlie 97T. @iscuss three. ANS: 9ust-7n-Time <97T= manufacturing is a model which fosters in)entory reduction and e)en elimination. 7t is based on the following assumptions: Zero defects are assumed for raw materials >7+ and finished goods. The presence of e8cessi)e defects would re&uire e8tra in)entory as security. Zero setup time is desired because set-up time is not producti)e. Small lot sizes permit high machine utili!ation. Zero inventories reduce the in)estment that can be utili!ed elsewhere. Zero lead times and reliable vendors are re&uired to ha)e the materials a)ailable when needed. A team attitude is re&uired of all employees. 14. The te8t discusses the e)ils of in)entory.; >hat are they? >hy are they e)il?; ANS: 7n)entories cost money. They represent an in)estment. They need to be insured and stored both of which cost money. 7n)entories can become obsolete o)er time. 7n)entories camouflage production problemsKif a cushion e8ists orders can be filled e)en if production is slowed or stopped due to difficulties. >illingness to maintain in)entories can precipitate o)erproductionKif an organi!ation is willing to ha)e high stoc( and if any incenti)es e8ist to produceKrewards etc. e8cess in)entory may be produces without ade&uate demand. 11. Automation of manufacturing can be )iewed as a progression beginning with the traditional manufacturing en)ironment. >hat are the stages? >hat distinguishes them? ANS: Automation of the manufacturing process can be )iewed as a gradual progression. The stages are: Traditional manufacturing which consists of many different types of machines that re&uire a lot of setup time each controlled by a single operator. The >7+ follows a circuitous route through the different operations. Islands of technology in which stand alone islands employ computer numerical controlled <6N6= machines that can perform multiple operations with less human in)ol)ementKless set up time. Process simplification which reduces the comple8ity of the physical layout. Groups of 6N6 machines are arranged in cells to produce an entire part from start to finish. No human in)ol)ement in a cell.
Computer integrated manufacturing <675=Ka completely automated en)ironment which employs automated storage and retrie)al systems
12. Fow can a firm control against e8cessi)e &uantities of raw materials being used in the manufacturing process. ANS: The use of standard costs pro)ides a type of access control. $y specifying the &uantities of material authori!ed for each product the firm limits usage. To obtain e8cess &uantities re&uires special authori!ation and e8cess materials re&uisitions. 1. 08plain the relationship between 5R+ 5R+77 and 0R+. ANS: 5anufacturing resources planning <5R+ 77= is an e8tension of a simpler concept still in use called materials re&uirements planning <5R+=. 5R+ is an automated )ersion of a traditional production planning and control process. n the other hand 5R+ 77 is a reengineering techni&ue that integrates se)eral business processes. 5R+ 77 is not confined to the management of in)entory. 7t is both a system and a philosophy for coordinating the acti)ities of the entire firm. As such 5R+ 77 has e)ol)ed into the large suites of software called enterprise reso$rce plannin% &ERP' systems. These huge commercial pac(ages support the information needs of the entire organi!ation not /ust the manufacturing functions. An 0R+ can calculate resource re&uirements schedule production manage changes to product configurations allow for future planned changes in products and monitor shop floor production. 7n addition the 0R+ pro)ides order entry cash receipts procurement and cash disbursement functions along with full financial and managerial reporting capability. 1#. 08plain how 6A@ can contribute to a firms mo)e toward world-class status. ANS: +roduct design has been re)olutioni!ed through 6A@ technology. Ad)anced 6A@ systems can design both product and process simultaneously. Thus aided by 6A@ management can e)aluate the technical feasibility of the product and determine its manufacturability.; 6A@ technology greatly shortens the time frame between initial and final design. This allows firms to ad/ust their production &uic(ly to changes in mar(et demand. 7t also allows them to respond to customer re&uests for uni&ue products. The 6A@ systems 0@7 interface permits the world-class manufacturer to share its product design specifications with its )endors and customers. This communications lin( also allows the world-class manufacturer to recei)e product design specifications electronically from its customers and suppliers for its re)iew. 1%. 08plain how 6A5 can contribute to a firms mo)e toward world-class status. ANS: 6omputer-aided manufacturing <6A5= focuses on the shop floor and the use of computers to control the physical manufacturing process. The ob/ecti)e behind 6A5 is to replace labor through automation. 6A5 systems monitor and control the production process and routing through the use of process control numerical control and robotics e&uipment. A world-class manufacturer will deri)e se)eral benefits from deploying a 6A5 system: impro)ed process producti)ity impro)ed cost and time estimates impro)ed process monitoring impro)ed process &uality decreased setup times and reduced labor costs. 1'. 08plain why traditional cost allocation methods fail in a 675 en)ironment.
ANS: Traditional accounting systems do not accurately trace costs to products and processes. ne conse&uence of new technologies is a changed relationship between direct labor and o)erhead costs. 7n the traditional manufacturing en)ironment direct labor is a much larger component of total manufacturing costs than in the 675 en)ironment. )erhead on the other hand is a far more significant element of cost in ad)anced technology manufacturing. 7n this setting traditional cost accounting procedures are inade&uate. "or traditional allocations to be correct a direct relationship between labor and technology needs to e8ist. 7n 675 this relationship is diametric rather than complementary. >hen the cost pool is large and the allocation method ambiguous any miscalculation in assigning labor is magnified many times in the calculation of o)erhead. 1*. 08plain how 97T can reduce in)entory. ANS: Jnder the 97T approach in)entories arri)e in small &uantities from )endors se)eral times per day /ust in time; to go into production. 97T supports a pull manufacturing process. As production capacity upstream becomes a)ailable the manufacturing process pulls small batches
