CHAPTER 14
THE PRODUCTION CYCLE
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
14.1. When activity-based cost reports indicate that excess capacity exists, management
should either find alternative revenue-enhancing uses for that capacity or eliminate
it through downsizing. What factors influence management’s decision? What are
the likely behavioral side effects of each choice? What implications do those side
effects have for the long-run usefulness of activity-based cost systems?
14.2. Why should accountants participate in product design? What insights about costs
can accountants contribute that differ from the perspectives of purchasing
managers and engineers?
14.3. Some companies have eliminated the collection and reporting of detailed analyses on
direct labor costs broken down by various activities. Instead, first-line supervisors
are responsible for controlling the total costs of direct labor. The justification for
this argument is that labor costs represent only a small fraction of the total costs of
producing a product and are not worth the time and effort to trace to individual
activities. Do you agree or disagree with this argument? Why?
The answers to these questions will determine whether the cost of collecting the data is
less than its value.
14.4. Typically, McDonald’s produces menu items in advance of customer orders based
on anticipated demand. In contrast, Burger King produces menu items only in
response to customer orders. Which system (MRP-II or lean manufacturing) does
each company use? What are the relative advantages and disadvantages of each
system?
14.5 Some companies have switched from a “management by exception” philosophy to a
“continuous improvement” viewpoint. The change is subtle, but significant.
Continuous improvement focuses on comparing actual performance to the ideal
(i.e., perfection). Consequently, all variances are negative (how can you do better
than perfect?). The largest variances indicate the areas with the greatest amount of
“waste,” and, correspondingly, the greatest opportunity for improving the bottom
line. What are the advantages and disadvantages of this practice?
SUGGESTED ANSWERS TO THE PROBLEMS
14.1. Match the terms in the left column with their definitions from the right column:
1. _c__ Bill of materials
a. A factor that causes costs to change.
2. _k__ Operations list
b. A measure of the number of good units produced
in a period of time.
3. _l__ Master Production
Schedule
c. A list of the raw materials used to create a
finished product.
4. _m_ Lean manufacturing
d. A document used to authorize removal of raw
materials from inventory.
5. _j__ Production order
e. A cost-accounting method that assigns costs to
products based on specific processes performed.
6. _d__ Materials requisition
f. A cost accounting method that assigns costs to
specific batches or production runs and is used
when the product or service consists of uniquely
identifiable items.
7. _i__ Move ticket
g. A cost accounting method that assigns costs to
each step or work center and then calculates the
average cost for all products that passed through
that step or work center.
8. _h__ Job-time ticket
h. A document that records labor costs associated
with manufacturing a product.
9. _f__ Job-order costing
i. A document that tracks the transfer of inventory
from one work center to another.
10. _a_ Cost driver
j. A document that authorizes the manufacture of a
finished good.
11. _b_ Throughput
k. A document that lists the steps required to
manufacture a finished good.
12. _o_ Computer-integrated
manufacturing
l. A document that specifies how much of a
finished good is to be produced during a specific
time period.
m. A production planning technique that is an
extension of the just–in–time inventory control
method.
n. A production planning technique that is an
extension of the Materials Requirement Planning
inventory control method.
o. A term used to refer to the use of robots and
other IT techniques as part of the production
process.
14.2 What internal control procedure(s) would best prevent or detect the following
problems?
a. A production order was initiated for a product that was already overstocked in
the company’s warehouse.
b. A production employee stole items of work-in–process inventory.
from the materials and lost, resulting in a costly delay.
d. A production employee entered a materials requisition form into the system in
order to steal $300 worth of parts from the raw materials storeroom.
e. A production worker entering job-time data on an online terminal mistakenly
entered 3,000 instead of 300 in the “quantity–completed” field.
f. A production worker entering job-time data on an online terminal mistakenly
posted the completion of operation 562 to production order 7569 instead of
production order 7596.
indicated on several materials requisitions and stole the excess quantities.
h. A production manager stole several expensive machines and covered up the loss
by submitting a form to the accounting department indicating that the missing
machines were obsolete and should be written off as worthless.
i. The quantity-on-hand balance for a key component shows a negative balance.
j. A factory supervisor accessed the operations list file and inflated the standards
for work completed in his department. Consequently, future performance
reports show favorable budget variances for that department.
k. A factory supervisor wrote off a robotic assembly machine as being sold for
salvage, but actually sold the machine and pocketed the proceeds.
l. Overproduction of a slow-moving product resulted in excessive inventory that
had to eventually be marked down and sold at a loss.
14.3 Use Table 14-1 to create a questionnaire checklist that can be used to evaluate
controls for each of the basic activities in the production cycle (product design,
planning and scheduling, production operations, and cost accounting).
a. For each control issue, write a Yes/No question such that a “No” answer
represents a control weakness.
A wide variety of questions is possible. Below is a sample list:
Question
Yes
No
1. Is access to production master data (production orders, inventory,
master production schedule, etc.) restricted?
2. Is the production master data regularly reviewed and all changes
investigated?
3. Is production data encrypted while stored in the database?
4. Does a backup and disaster recovery plan exist?
5. Have backup procedures been tested within the past year?
6. Are appropriate data entry edit controls used?
7. Is a perpetual inventory of raw materials components maintained?
8. Are physical counts of raw materials inventory taken regularly and
used to adjust the perpetual inventory records?
9. Are competitive bids used when ordering fixed assets?
10. Are reports prepared showing the number of unique components for
each finished product?
11. Are warranty and repair costs tracked for each finished product?
12. Is a Master Production Schedule (MPS) created and followed?
13. Are materials requisitions used to authorize and document removal of
raw materials from inventory?
14. Are move tickets used to document transfers of raw materials and
work-in–process in the factory?
15. Are the disposals of fixed assets documented?
16. Is there insurance against losses due to fire, flood, or other disaster?
b. For each Yes/No question, write a brief explanation of why a “No” answer
represents a control weakness.
Reason a “No” answer represents a weakness
Unrestricted access to the production master data could result in disclosure of trade
secrets or creation of unauthorized production orders.
Failure to investigate all changes to production master data may allow errors to
remain undetected that result in over- or under-production of finished goods.
Failure to encrypt production data can result in the unauthorized disclosure of
sensitive information.
If a backup and disaster recovery plan does not exist, the organization may lose
important data.
If the backup plan is not regularly tested, it may not work.
Without proper data entry edit controls, errors may occur in recording production
operations, which may result in inventory valuation errors, over- or under-
production, or poor pricing decisions.
Without a perpetual inventory system, shortages and excess inventory is more
likely.
Without periodic physical counts and any necessary inventory records adjustments,
the perpetual inventory records are likely to be incorrect.
Without competitive bids, purchases may be at higher than necessary prices.
Failure to track the number of common and unique components used can result in
poor product design or excessive costs of production and inventory.
Failure to trace warranty and repair costs to specific finished products precludes
correcting poor product designs.
Without a Master Production Schedule, unauthorized production orders could
result in over-production of finished goods. There could also be underproduction
of finished goods.
Failure to document transfer of raw materials from inventory stores can lead to
theft.
Not documenting the transfer of raw materials and work-in-process can prevent
discovery of theft and make it difficult to identify the perpetrator.
Not documenting the disposal of fixed assets can cover up theft and make it
difficult to identify the perpetrator.
Lack of adequate insurance exposes the organization to the risk of substantial
monetary loss in the event of an insurable incident.
14.4 You have recently been hired as the controller for a small manufacturing firm that
makes high-definition televisions. One of your first tasks is to develop a report
measuring throughput.
Describe the data required to measure throughput and the most efficient and
accurate method of collecting that data.
14.5 The Joseph Brant Manufacturing Company makes athletic footwear. Processing of
production orders is as follows: At the end of each week, the production planning
department prepares a master production schedule (MPS) that lists which shoe
styles and quantities are to be produced during the next week. A production order
preparation program accesses the MPS and the operations list (stored on a
permanent disk file) to prepare a production order for each shoe style that is to be
manufactured. Each new production order is added to the open production order
master file stored on disk.
Each day, parts department clerks review the open production orders and the MPS
to determine which materials need to be released to production. All materials are
bar-coded. Factory workers work individually at specially designed U-shaped work
areas equipped with several machines to assist them in completely making a pair of
shoes. Factory workers scan the bar-codes as they use materials. To operate a
machine, the factory workers swipe their ID badge through a reader. This results in
the system automatically collecting data identifying who produced each pair of
shoes and how much time it took to make them.
Once a pair of shoes is finished, it is placed in a box. The last machine in each work
cell prints a bar-code label that the worker affixes to the box. The completed shoes
are then sent to the warehouse.
a. Prepare a data flow diagram of all operations described.
b. What control procedures should be included in the system?
2.0
Prepare
Production
Order
3.0
Perform
Production
Operation
inventory
sales forecasts
open
production
orders
operations list
bill of materials
Production
Order Operations
Card
Production
Orders
Scheduled
Production
MPS
1.0
Plan
Production
QOH
Work
Activity
14.6 The XYZ company’s current production processes have a scrap rate of 15% and a
return rate of 3%. Scrap costs (wasted materials) are $12 per unit; warranty/repair
costs average $60 per unit returned. The company is considering the following
alternatives to improve its production processes:
• Option A: Invest $400,000 in new equipment. The new process will also require
an additional $1.50 of raw materials per unit produced. This option is predicted
to reduce both scrap rates return rates by 40% from current levels.
• Option B: Invest $50,000 in new equipment, but spend an additional $3.20 on
higher quality raw materials per unit produced.This option is predicted to
reduce both scrap and return rates by 90% from current levels.
• Option C: Invest $2,000,000 in new equipment. The new process will require no
change in raw materials. This option is predicted to reduce both scrap and
return rates by 50% from current levels.
a. Assume that current production levels of 1,000,000 units will continue. Which
option do you recommend? Why?
At current production levels of 1,000,000 units, none of the options reduce total costs, but
option B results in the smallest increase in total costs.
Option A: