The words you are searching are inside this book. To get more targeted content, please make full-text search by clicking here.
Discover the best professional documents and content resources in AnyFlip Document Base.
Search
Published by gideonganolon999, 2019-11-12 22:03:15

175338995-Hall-5e-TB-Ch07

175338995-Hall-5e-TB-Ch07

Chapter 7—The 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 customers
.
b customers in a world-class company are external departments only
.
c world-class companies work in cross-functional teams
.

d 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 process
.
b determining raw material requirements
.
c authorizing work to be performed
.
d monitoring the flow of cost information related to production
.

ANS: D

3. The purpose of the cost accounting system is to
a produce information for inventory valuation
.
b authorize release of raw materials
.
c direct the movement of work-in-process
.
d determine material requirements
.

ANS: A

4. Which process creates a homogeneous product through a continuous series of standard procedures?
a batch process
.
b make-to-order process
.
c continuous process
.
d none of the above
.

ANS: C

5. An example of a continuous process is the production of
a wedding invitations
.
b milk products
.
c jet aircraft
.

d all of the above
.

ANS: B

6. All of the following are characteristics of batch processing except
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 inventory levels
.
d setting up and retooling is required for different batches
.

ANS: B

7. When determining which items to produce, a firm must know
a last year’s production level
.
b raw material inventory levels
.
c the standard cost of the item
.
d the sales forecast
.

ANS: D

8. The production schedule is
a the expected demand for the firm’s finished goods for a given year
.
b the formal plan and authority to begin production
.
c a description of the type and quantity of raw materials and subassemblies used to
. produce a single unit of finished product
d the sequence of operations during manufacturing
.

ANS: B

9. A move ticket
a is the formal plan and authority to begin production
.
b specifies the materials and production required for each batch
.
c records the work done in each work center
.

d authorizes the storekeeper to release materials to work centers
.

ANS: C

10. The internal control significance of the excess materials requisition is that it
a indicates the amount of material released to work centers
.
b identifies materials used in production that exceed the standard amount allowed
.
c indicates the standard quantities required for production
.
d documents the return to raw materials inventory of unused production materials
.

ANS: B

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

ANS: C

12. The storekeeper releases raw materials based on the
a production schedule
.
b materials requisition
.
c work order
.
d 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 certainty
.
b total cost per year of placing orders is fixed
.
c lead time is known and is constant
.

d there are no quantity discounts
.

ANS: B

14. Firms hold safety stock to compensate for
a mathematical weaknesses of the Economic Order Quantity model
.
b variations in lead time or daily demand
.
c fluctuations in carrying costs
.
d 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 174
.
b 123
.
c 245
.
d none of the above
.

ANS: A

16. If the daily demand is 40 units and the lead time is 12 days, the reorder point is
a 52 units
.
b 48 units
.
c 480 units
.
d 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 control
b cost accounting updates the cost record with data gathered from the materials requisition
.
c general ledger posts summary information about the manufacturing process based on a

. journal voucher prepared by cost accounting
d 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 quality
.
b customer service
.
c revenue generation
.
d resource management
.

ANS: C

19. Computer integrated manufacturing groups all of the following technologies except
a robotics
.
b materials requirements planning
.
c automated storage and retrieval systems
.
d 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 except
a human resources
.
b business process support
.
c strategic
.
d financial
.

ANS: C

21. Which situation violates the segregation of functions control procedure?
a production planning and control is located apart from the work centers
.
b inventory control maintains custody of inventory items
.

c cost accounting has custody of and makes entries on cost records
.
d 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
except
a calculation and analysis of direct material and direct labor variances
.
b retention of excess materials by work centers
.
c physical count of inventory items on hand
.
d limited access to raw material and finished goods inventories
.

ANS: B

23. Process simplification focuses on
a using Computer Numerical Controlled machines which stand alone within a traditional
. setting
b completely automating the manufacturing environment
.
c reducing the complexity of the physical manufacturing layout of the shop floor
.
d organizing the process into functional departments
.

ANS: C

24. A manufacturing process that is organized into group technology cells utilizing no human labor is
called
a islands of technology
.
b process simplification
.
c Computer Integrated Manufacturing
.
d traditional manufacturing
.

ANS: C

25. An example of automation of manufacturing design is
a Computer Aided Engineering
.

b Automated Storage and Retrieval Systems
.
c Computer Numerical Control
.
d robotics
.

ANS: A

26. An example of automation of manufacturing planning is
a Computer Aided Engineering
.
b Automated Storage and Retrieval Systems
.
c Materials Requirements Planning
.
d Computer Numerical Control
.

ANS: C

27. Firms implement a Just-In-Time inventory approach to
a reduce investment in inventories
.
b determine the optimum inventory level using the EOQ model
.
c camouflage production problems
.
d ensure overproduction of inventory
.

ANS: A

28. Characteristics of Just-In-Time manufacturing include all of the following except
a push manufacturing
.
b zero defects
.
c reduced setup time and small lot sizes
.
d reliable vendors
.

ANS: A

29. The cost of poor quality includes all of the following except
a cost of rework
.

b warranty claims
.
c scheduling delays
.
d proceeds from the sale of scrap
.

ANS: D

30. A flexible manufacturing system
a creates bottlenecks in the process
.
b leads to an “us” versus “them” attitude among workers
.
c shortens the physical distance between activities
.
d is organized along functional lines
.

ANS: C

31. Deficiencies of the traditional cost accounting information system include all of the following except
a an emphasis on financial performance
.
b inaccurate cost allocations
.
c an emphasis on standard costs
.
d 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 object
.
b cost object describes the work performed in a firm
.
c activities cause costs
.
d cost objects create a demand for activities
.

ANS: B

33. Firms are adopting Activity Based Costing (ABC) because
a it facilitates the analysis of variances
.

b it more accurately allocates costs to products
.
c it recognizes the importance of direct labor as a component of total manufacturing cost
.
d the financial nature of the reports permits comparisons to be made among different types
. of products

ANS: B

34. In traditional firms, information reporting
a provides financially oriented information relating to operations
.
b presents detailed information about activities
.
c shows the allocation of costs first to activities and then to cost objects
.
d identifies nonessential activities
.

ANS: A

35. Types of information provided by Activity Based Costing include
a a description of the single activity driver used for overhead application
.
b the dollar value of the direct material usage variance
.
c identification of cost drivers
.
d 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 firms
.
b critical success factors include product and process quality
.
c the ABC model includes two perspectives: an allocation of cost perspective and a process
. perspective
d 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 except
a production schedule
.

b route sheet
.
c materials requisition
.
d purchase order
.

ANS: D

38. Transaction authorization occurs in a traditional manufacturing environment in all of the following
ways except
a production planning and control initiates production with a work order
.
b movement of the work through the production process follows the move ticket
.
c the sales department modifies work orders to match changes in demand
.
d 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 except
a high product quality
.
b high inventory levels
.
c automation of manufacturing processes
.
d 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
. simplification
b process simplification, traditional, islands of technology, computer-integrated
. manufacturing
c traditional, islands of technology, process simplification, computer-integrated
. manufacturing
d 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 inputs–materials (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 firm’s product must meet or exceed the customer’s 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 problems–if a cushion exists, orders can be filled even if
production is slowed or stopped due to difficulties.
Willingness to maintain inventories can precipitate overproduction–if an organization is willing to
have high stock, and if any incentives exist to produce–rewards 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 involvement–less 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 firm’s 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 system’s 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 firm’s 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.


Click to View FlipBook Version