Chapter 7The Conversion Cycle

TRUE/FALSE

1.The philosophy of customer satisfaction permeates the world-class firm.

ANS:T

2.Reports generated by the cost accounting system include performance reports and budget reports.

ANS:T

3.The cost accounting system authorizes the release of raw materials into production.

ANS:F

4.Batch processing creates a homogeneous product through a continuous series of standard procedures.

ANS:F

5.The bill of materials specifies the types and quantities of the raw materials and subassemblies used in producing a single unit of finished product.

ANS:T

6.A purchase requisition authorizes the storekeeper to release materials to individuals or work centers in the production process.

ANS:F

7.The SAP R/3 system organizes business processes into four categories: financial, logistics, human resources, and business process support.

ANS:T

8.The objective of the Economic Order Quantity model is to reduce total inventory costs by minimizing carrying costs and ordering costs.

ANS:T

9.The work-in-process file is the subsidiary ledger for the work-in-process control account.

ANS:T

10.Move tickets authorize the storekeeper to release materials to work centers.

ANS:F

11.An operating characteristic of modern manufacturing firms is that labor is replaced with capital so that the firm can be more efficient and therefore more competitive.

ANS:T

12.Computer Integrated Manufacturing focuses on reducing the complexity of the physical manufacturing layout of the shop floor.

ANS:F

13.The only objective of the Just-In-Time philosophy is to reduce inventory levels.

ANS:F

14.Accounting in a world-class manufacturing environment emphasizes standard cost and variance analysis.

ANS:F

15.Identifying cost drivers is an essential step in implementing the Just-In-Time philosophy.

ANS:F

16.A world class information system produces very little paper.

ANS:T

17.Internal control procedures are virtually identical in a world-class manufacturing environment and in a traditional manufacturing environment.

ANS:F

18.In a world-class company, all activities, from acquisition of raw materials to selling the final product, form a chain of customers.

ANS:T

19.The two subsystems of a traditional conversion cycle are the production system and the delivery system.

ANS:F

20.Manufacturing resources planning (MRP II) has evolved into electronic resource planning (ERP).

ANS:F

MULTIPLE CHOICE

1.Which item does not describe a world-class company?a.the goal of a world-class company is to delight its customersb.customers in a world-class company are external departments onlyc.world-class companies work in cross-functional teamsd.a world-class company has a flat organizational structure

ANS:B

2.Which subsystem is not a part of the production system?a.directing the movement of work through the processb.determining raw material requirementsc.authorizing work to be performedd.monitoring the flow of cost information related to production

ANS:D

3.The purpose of the cost accounting system is toa.produce information for inventory valuationb.authorize release of raw materialsc.direct the movement of work-in-processd.determine material requirements

ANS:A

4.Which process creates a homogeneous product through a continuous series of standard procedures?a.batch processb.make-to-order processc.continuous processd.none of the above

ANS:C

5.An example of a continuous process is the production ofa.wedding invitationsb.milk productsc.jet aircraftd.all of the above

ANS:B

6.All of the following are characteristics of batch processing excepta.each item in the batch is similarb.batches are produced in accordance with detailed customer specificationsc.batches are produced to replenish depleted inventory levelsd.setting up and retooling is required for different batches

ANS:B

7.When determining which items to produce, a firm must knowa.last years production levelb.raw material inventory levelsc.the standard cost of the itemd.the sales forecast

ANS:D

8.The production schedule isa.the expected demand for the firms finished goods for a given yearb.the formal plan and authority to begin productionc.a description of the type and quantity of raw materials and subassemblies used to produce a single unit of finished productd.the sequence of operations during manufacturing

ANS:B

9.A move ticketa.is the formal plan and authority to begin productionb.specifies the materials and production required for each batchc.records the work done in each work centerd.authorizes the storekeeper to release materials to work centers

ANS:C

10.The internal control significance of the excess materials requisition is that ita.indicates the amount of material released to work centersb.identifies materials used in production that exceed the standard amount allowedc.indicates the standard quantities required for productiond.documents the return to raw materials inventory of unused production materials

ANS:B

11.Inventory control performs all of the following tasks except ita.provides production planning and control with the inventory status report of finished goodsb.updates the raw material inventory recordsc.prepares a materials requisition for each production batchd.records the completed production as an increase to finished goods inventory

ANS:C

12.The storekeeper releases raw materials based on thea.production scheduleb.materials requisitionc.work orderd.bill of materials

ANS:B

13.Which of the following is not an assumption of the Economic Order Quantity model?a.demand for the product is known with certaintyb.total cost per year of placing orders is fixedc.lead time is known and is constantd.there are no quantity discounts

ANS:B

14.Firms hold safety stock to compensate fora.mathematical weaknesses of the Economic Order Quantity modelb.variations in lead time or daily demandc.fluctuations in carrying costsd.uncertainty in the estimation of ordering costs

ANS:B

15.What is the economic order quantity if the annual demand is 10,000 units, set up cost of placing each order is $3 and the holding cost per unit per year is $2?a.174b.123c.245d.none of the above

ANS:A

16.If the daily demand is 40 units and the lead time is 12 days, the reorder point isa.52 unitsb.48 unitsc.480 unitsd.none of the above

ANS:C

17.Which statement is not correct?a.general ledger creates a new cost record upon receipt of a work order from production planning and controlb.cost accounting updates the cost record with data gathered from the materials requisitionc.general ledger posts summary information about the manufacturing process based on a journal voucher prepared by cost accountingd.cost accounting computes variances and applies overhead to individual cost records

ANS:A

18.Which of the following is not a category of critical success factors in most manufacturing companies?a.product qualityb.customer servicec.revenue generationd.resource management

ANS:C

19.Computer integrated manufacturing groups all of the following technologies excepta.roboticsb.materials requirements planningc.automated storage and retrieval systemsd.computer aided design

ANS:B

20.The SAP R/3 system provides pre-defined modules to support business processes in the all of the following categories excepta.human resourcesb.business process supportc.strategicd.financial

ANS:C

21.Which situation violates the segregation of functions control procedure?a.production planning and control is located apart from the work centersb.inventory control maintains custody of inventory itemsc.cost accounting has custody of and makes entries on cost recordsd.work centers record direct labor on job tickets

ANS:B

22.All of the following are internal control procedures that should be in place in the conversion cycle excepta.calculation and analysis of direct material and direct labor variancesb.retention of excess materials by work centersc.physical count of inventory items on handd.limited access to raw material and finished goods inventories

ANS:B

23.Process simplification focuses ona.using Computer Numerical Controlled machines which stand alone within a traditional settingb.completely automating the manufacturing environmentc.reducing the complexity of the physical manufacturing layout of the shop floord.organizing the process into functional departments

ANS:C

24.A manufacturing process that is organized into group technology cells utilizing no human labor is calleda.islands of technologyb.process simplificationc.Computer Integrated Manufacturingd.traditional manufacturing

ANS:C

25.An example of automation of manufacturing design isa.Computer Aided Engineeringb.Automated Storage and Retrieval Systemsc.Computer Numerical Controld.robotics

ANS:A

26.An example of automation of manufacturing planning isa.Computer Aided Engineeringb.Automated Storage and Retrieval Systemsc.Materials Requirements Planningd.Computer Numerical Control

ANS:C

27.Firms implement a Just-In-Time inventory approach toa.reduce investment in inventoriesb.determine the optimum inventory level using the EOQ modelc.camouflage production problemsd.ensure overproduction of inventory

ANS:A

28.Characteristics of Just-In-Time manufacturing include all of the following excepta.push manufacturingb.zero defectsc.reduced setup time and small lot sizesd.reliable vendors

ANS:A

29.The cost of poor quality includes all of the following excepta.cost of reworkb.warranty claimsc.scheduling delaysd.proceeds from the sale of scrap

ANS:D

30.A flexible manufacturing systema.creates bottlenecks in the processb.leads to an us versus them attitude among workersc.shortens the physical distance between activitiesd.is organized along functional lines

ANS:C

31.Deficiencies of the traditional cost accounting information system include all of the following excepta.an emphasis on financial performanceb.inaccurate cost allocationsc.an emphasis on standard costsd.immediate feedback about deviations from the norm

ANS:D

32.Which statement is not correct?a.an activity driver is a means to measure the activity used by the cost objectb.cost object describes the work performed in a firmc.activities cause costsd.cost objects create a demand for activities

ANS:B

33.Firms are adopting Activity Based Costing (ABC) becausea.it facilitates the analysis of variancesb.it more accurately allocates costs to productsc.it recognizes the importance of direct labor as a component of total manufacturing costd.the financial nature of the reports permits comparisons to be made among different types of products

ANS:B

34.In traditional firms, information reportinga.provides financially oriented information relating to operationsb.presents detailed information about activitiesc.shows the allocation of costs first to activities and then to cost objectsd.identifies nonessential activities

ANS:A

35.Types of information provided by Activity Based Costing includea.a description of the single activity driver used for overhead applicationb.the dollar value of the direct material usage variancec.identification of cost driversd.details of the components of the single overhead cost pool

ANS:C

36.Which statement is not correct?a.the benchmark approach compares key activities with similar activities in other firmsb.critical success factors include product and process qualityc.the ABC model includes two perspectives: an allocation of cost perspective and a process perspectived.in world-class manufacturing firms, quality control activities at the end of the process are essential

ANS:D

37.All of the following are documents in batch process production systems excepta.production scheduleb.route sheetc.materials requisitiond.purchase order

ANS:D

38.Transaction authorization occurs in a traditional manufacturing environment in all of the following ways excepta.production planning and control initiates production with a work orderb.movement of the work through the production process follows the move ticketc.the sales department modifies work orders to match changes in demandd.the materials requisition authorizes the storekeeper to release materials to the work centers

ANS:C

39.Manufacturing flexibility incorporates four characteristics. These include all of the following excepta.high product qualityb.high inventory levelsc.automation of manufacturing processesd.physical reorganization of production facilities

ANS:B

40.The stages of the automation continuum are (in order)a.traditional, computer-integrated manufacturing, islands of technology, process simplificationb.process simplification, traditional, islands of technology, computer-integrated manufacturingc.traditional, islands of technology, process simplification, computer-integrated manufacturingd.traditional, process simplification, computer-integrated manufacturing, islands of technology

ANS:C

SHORT ANSWER

1.Which type of manufacturing creates a homogeneous product through a continuous series of standard procedures?

ANS:continuous process manufacturing

2.What information is contained in the bill of materials (BOM)?

ANS:The BOM specifies the types and quantities of raw materials and subassemblies used in producing a single unit of finished product.

3.What is the difference between a materials requisition and a purchase requisition?

ANS:A materials requisition authorizes the storekeeper to release materials and subassemblies to the production process. A purchase requisition authorizes the purchasing department to place an order with an external vendor to acquire goods or services.

4.List one authorization control in the traditional manufacturing environment.

ANS:work orders prepared by production planning and control; move tickets signed by the foreman; materials requisitions and excess materials requisitions

5.Explain how Just-In-Time inventory affects setup time and lot size.

ANS:In a Just-In-Time process, setup time should be reduced as much as possible, ideally to zero, and lot sizes should be very small to ensure a continuous flow of product through the process.

6.What is one benefit of the flexible production system?

ANS:A flexible production system shortens the physical distance between activities, reducing setup time, processing time, handling costs, and inventories.

7.List two disadvantages of using a traditional cost accounting system.

ANS:Cost allocations may be inaccurate; there is a time lag in reporting; information is reported in financial terms; there is an emphasis on standard cost.

8.In Activity Based Costing, what is the term used to refer to the work performed by a firm?

ANS:an activity

9.In Activity Based Costing, the activity cost is assigned to the cost object by means of __________________________.

ANS:an activity (or cost) driver

10.Explain benchmarking.

ANS:When a process is benchmarked, key activities are compared to similar activities performed elsewhere in the firm or in other firms.

11.Provide a specific example of source data automation.

ANS:bar coding, magnetic ink character recognition, electronic strip, optical character recognition

12.In a traditional manufacturing environment, cost accounting provides independent verification of what information? What are the benefits?

ANS:Cost accounting reconciles materials and labor usage, from the materials requisitions and job tickets, with prescribed standards and identifies significant departures. Such variance analysis is important for control of the manufacturing process.

13.How are cost structures fundamentally different between the traditional and CIM environments?

ANS:In the traditional manufacturing environment, direct labor is a much larger component of total manufacturing costs than in the CIM environment. Overhead, on the other hand, is a far more significant element of cost in advanced technology manufacturing.

14.What are the key segregation of duties issues in the conversion cycle?

ANS:Inventory control must be separated from raw materials and finished goods custody. Cost accounting must be separate from the work centers. General ledger must be separate from other accounting functions.

15.Traditional accounting assumes that products cause costs. ABC assumes that _________________ cause costs.

ANS:activities

16.Differentiate between essential and non-essential activities.

ANS:Essential activities add value to the organization either through adding value to the customer or to the organization. Non-essential activities do not add value.

17.Name the underlying assumptions of the JIT method.

ANS:Zero defects, zero setups, small lot sizes, zero inventories, zero lead times & reliable vendors, and team attitude.

18.What document signals the completion of the production process?

ANS:The receipt by cost accounting of the last move ticket for a batch from the work center signals the completion of the production process.

19.What document triggers the beginning of the cost accounting process for a given production run?

ANS:The work order from the production planning and control department triggers the cost accounting process.

20.Name five documents associated with batch production systems.

ANS:Sales forecast, production schedule, bill of materials, route sheet, work order, move ticket, and materials requisition.

ESSAY

1.What are the accounting implications when a firm moves toward world-class status?

ANS:When a firm moves toward world-class status, changes will be required in accounting techniques, in information reporting, and in the integration of the information system. World-class companies will apply accounting techniques like Activity Based Costing to obtain improved cost information in order to make better decisions concerning pricing, product mix, and product and process design.

Information will be developed to help managers understand and evaluate manufacturing activities, identify and eliminate nonessential activities, identify cost drivers, and establish links between performance measures and decision making.

Finally, firms will implement information systems that integrate financial and nonfinancial information using software like the Manufacturing Resource Planning II. Firms will maintain an electronic link with external parties by implementing Electronic Data Interchange (EDI).

2.Contrast the treatment of inventories in the traditional manufacturing environment and the world-class manufacturing environment.

ANS:In the traditional manufacturing environment, inventories are used to reduce or eliminate back orders. The goal in the traditional environment is to minimize the cost of holding inventory and the costs of ordering or manufacturing inventory.

In a world-class manufacturing environment the Just-In-Time (JIT) inventory system is often implemented. Inventories are kept to the absolute minimum. Inventories arrive in small quantities from vendors several times per day. Inventory is pulled through the manufacturing process; there are no batches of partially completed products throughout the production process. The JIT inventory concept assumes: zero defects, zero setup time, small lot sizes, zero inventories, zero lead time, and reliable vendors.

3.Discuss the key segregation of duties that should exist in the traditional manufacturing environment.

ANS:Production planning and control should be separate from the work centers.

Inventory control, which maintains accounting records for raw materials (RM) and (FG) inventories should be kept separate from the materials storeroom and from the FG warehouse functions where these assets reside.

The cost accounting function accounts for work in process and should be separate from the work centers in the production process.

The general ledger (GL) function should be separate from departments keeping subsidiary account

4.What are the four categories of business processes as defined as modules by SAP R/3? Explain.

ANS:Financial: The financial modules include the financial accounting module that collects financial data for both internal and external reporting, the controlling module for reporting and controlling costs, the fixed asset management module that supports the management of fixed, leased, and real corporate assets, and the ability to respond to interactive requests.Logistics: The logistics modules support manufacturing by means of an available-to-promise module to respond to customer inquiries, sales and distribution module to handle order entry and order status, a product planning module for forecasting, and additional modules for materials management, service calls, and plant maintenance.Human resources: This module supports management of employees including hiring, work scheduling, and payroll processing.Business process support: Two types of modules handle workflow and industry specific activities.

5.How can a world-class information system yield a paperless environment?

ANS:Traditional paper flow can be essentially eliminated in a world-class information system environment. Savings occur by eliminating printing, handling, filing of paper documents, and data entry errors. Part of the benefit comes from source data automation using technologies such as bar coding (the familiar UPC code permits scanning which eliminates most errors). Thus, recording of materials is simplified. Magnetic monitoring of labor is possible to tally labor charges and movement of equipment and inventory.

6.How does MRP II (manufacturing resource planning) expand on MRP (materials requirements planning)?

ANS:MRP is an older system that focused only on the materials requirements of the production process. It used work orders as a basis for a bill of materials and to determine inventory requirements prior to production. MRP II expands on this idea by identifying production need for all inputsmaterials (as in MRP), labor, and equipment. In fact, MRP II provides planning, feedback, and control for coordinating all of the activities of a firm.

7.Name and explain the five categories of critical success factors.

ANS:Product quality: The firms product must meet or exceed the customers expectations.Process quality: The amount of process variation that results in scrap or rework must be minimized.Customer service: The demands of customers for finished products must be met.Resource management: The firm must maximize the use of all resources in manufacturing.Flexibility: The firm must be willing to adjust to changes in demands in its environment.

8.MRP II integrates product design and the production process with order entry, accounting. and activity based costing. What are some of the benefits?

ANS:The benefits include: improved customer service, reduced inventory investment, increased productivity, improved cash flow, assistance in achieving long-term strategic goals, help in managing changes and flexibility in the production process.

9.The Just-In-Time (JIT) approach to inventories is regarded as a great advance in inventory management. There are six assumptions that underlie JIT. Discuss three.

ANS:Just-In-Time (JIT) manufacturing is a model which fosters inventory reduction and even elimination. It is based on the following assumptions:Zero defects are assumed for raw materials, WIP, and finished goods. The presence of excessive defects would require extra inventory as security.Zero setup time is desired because set-up time is not productive.Small lot sizes permit high machine utilization.Zero inventories reduce the investment that can be utilized elsewhere.Zero lead times and reliable vendors are required to have the materials available when needed.A team attitude is required of all employees.

10.The text discusses the evils of inventory. What are they? Why are they evil?

ANS:Inventories cost money. They represent an investment. They need to be insured and stored, both of which cost money. Inventories can become obsolete over time.Inventories camouflage production problemsif a cushion exists, orders can be filled even if production is slowed or stopped due to difficulties.Willingness to maintain inventories can precipitate overproductionif an organization is willing to have high stock, and if any incentives exist to producerewards etc., excess inventory may be produces without adequate demand.

11.Automation of manufacturing can be viewed as a progression beginning with the traditional manufacturing environment. What are the stages? What distinguishes them?

ANS:Automation of the manufacturing process can be viewed as a gradual progression. The stages are:Traditional manufacturing which consists of many different types of machines that require a lot of setup time, each controlled by a single operator. The WIP follows a circuitous route through the different operations.

Islands of technology in which stand alone islands employ computer numerical controlled (CNC) machines that can perform multiple operations with less human involvementless set up time.

Process simplification which reduces the complexity of the physical layout. Groups of CNC machines are arranged in cells to produce an entire part from start to finish. No human involvement in a cell.

Computer integrated manufacturing (CIM)a completely automated environment which employs automated storage and retrieval systems (AS/RS) and robotics.

12.How can a firm control against excessive quantities of raw materials being used in the manufacturing process.

ANS:The use of standard costs provides a type of access control. By specifying the quantities of material authorized for each product, the firm limits usage. To obtain excess quantities requires special authorization and excess materials requisitions.

13.Explain the relationship between MRP, MRPII and ERP.

ANS:Manufacturing resources planning (MRP II) is an extension of a simpler concept still in use called materials requirements planning (MRP). MRP is an automated version of a traditional production planning and control process. On the other hand, MRP II is a reengineering technique that integrates several business processes. MRP II is not confined to the management of inventory. It is both a system and a philosophy for coordinating the activities of the entire firm. As such, MRP II has evolved into the large suites of software called enterprise resource planning (ERP) systems. These huge commercial packages support the information needs of the entire organization, not just the manufacturing functions. An ERP can calculate resource requirements, schedule production, manage changes to product configurations, allow for future planned changes in products, and monitor shop floor production. In addition, the ERP provides order entry, cash receipts, procurement, and cash disbursement functions along with full financial and managerial reporting capability.

14.Explain how CAD can contribute to a firms move toward world-class status.

ANS:Product design has been revolutionized through CAD technology. Advanced CAD systems can design both product and process simultaneously. Thus, aided by CAD, management can evaluate the technical feasibility of the product and determine its manufacturability. CAD technology greatly shortens the time frame between initial and final design. This allows firms to adjust their production quickly to changes in market demand. It also allows them to respond to customer requests for unique products. The CAD systems EDI interface permits the world-class manufacturer to share its product design specifications with its vendors and customers. This communications link also allows the world-class manufacturer to receive product design specifications electronically from its customers and suppliers for its review.

15.Explain how CAM can contribute to a firms move toward world-class status.

ANS:Computer-aided manufacturing (CAM) focuses on the shop floor and the use of computers to control the physical manufacturing process. The objective behind CAM is to replace labor through automation. CAM systems monitor and control the production process and routing through the use of process control, numerical control, and robotics equipment. A world-class manufacturer will derive several benefits from deploying a CAM system: improved process productivity, improved cost and time estimates, improved process monitoring, improved process quality, decreased setup times, and reduced labor costs.

16.Explain why traditional cost allocation methods fail in a CIM environment.

ANS:Traditional accounting systems do not accurately trace costs to products and processes. One consequence of new technologies is a changed relationship between direct labor and overhead costs. In the traditional manufacturing environment, direct labor is a much larger component of total manufacturing costs than in the CIM environment. Overhead, on the other hand, is a far more significant element of cost in advanced technology manufacturing. In this setting, traditional cost accounting procedures are inadequate. For traditional allocations to be correct, a direct relationship between labor and technology needs to exist. In CIM, this relationship is diametric rather than complementary. When the cost pool is large and the allocation method ambiguous, any miscalculation in assigning labor is magnified many times in the calculation of overhead.

17.Explain how JIT can reduce inventory.

ANS:Under the JIT approach, inventories arrive in small quantities from vendors several times per day just in time to go into production. JIT supports a pull manufacturing process. As production capacity upstream becomes available, the manufacturing process pulls small batches (or a single item) of product into the next work center. Rather than periodically taking in large batches, JIT promotes a continuous flow of production through the process pulled along by idle capacity. Unlike the traditional push process, JIT does not create batches of semi-finished inventories at bottlenecks.