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?
It will often be easier to identify opportunities to downsize and eliminate jobs than to find
creative value-adding activities for excess capacity. Thus, management may be more
likely to eliminate excess capacity than to redirect it to new tasks. This can have serious
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Ch. 14: The Production Cycle
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?
Product design is concerned with designing a product that meets customer requirements
in terms of quality, durability, and functionality while also minimizing costs.
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?
This question should create some debate. The important issues to keep in mind are:
How will management use detailed labor data?
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Accounting Information Systems
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?
McDonald’s uses MRP-II; Burger King uses JIT.
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?
An advantage of continuous improvement reports is that they combat the tendency for
complacency.
B
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Ch. 14: The Production Cycle
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.
o. A term used to refer to the use of robots and other
IT techniques as part of the production process.
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Accounting Information Systems
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.
Base the master production schedule on
Current data on product sales
b. A production employee stole items of work-in-process inventory.
Ensure good supervision by factory supervisors.
c. The “rush-order” tag on a partially completed production job became detached
from the materials and lost, resulting in a costly delay.
Use rush order tags
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.
Limit authority to prepare or authorize materials requisitions to production
B
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Ch. 14: The Production Cycle
e. A production worker entering job-time data on an online terminal mistakenly
entered 3,000 instead of 300 in the “quantity-completed” field.
Validate input by comparing the quantity entered with the quantity scheduled
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.
Have the system keep track of which order each employee is working on and
oVerify that the production order number properly corresponds to the employee
g. A parts storeroom clerk issued parts in quantities 10% lower than those
indicated on several materials requisitions and stole the excess quantities.
The discrepancy should show up in an unfavorable materials usage variance, since
the shortage will necessitate requesting additional goods. To deter this type of
problem:
Require the recipient of inventories from stores to sign a requisition for the exact
quantities received
Hold the recipient responsible for shortages to provide an incentive to accurately
count what is received.
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.
Limit authority to write off expensive machines to management
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Accounting Information Systems
i. The quantity-on-hand balance for a key component shows a negative balance.
Use sign checks on master file balances after every file update
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.
Restrict update access to operations list to a limited number of authorized
k. A factory supervisor wrote off a robotic assembly machine as being sold for
salvage, but actually sold the machine and pocketed the proceeds.
Limit authority to write off machines to management
Document all transactions involving the acquisition or disposal of fixed assets.
l. Overproduction of a slow-moving product resulted in excessive inventory that
had to eventually be marked down and sold at a loss.
Create a Master Production Schedule based on information from sales forecasts
B
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Ch. 14: The Production Cycle
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?
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b. For each Yes/No question, write a brief explanation of why a “No” answer
represents a control weakness.
Question Reason a “No” answer represents a weakness
1 Unrestricted access to the production master data could result in disclosure of trade
secrets or creation of unauthorized production orders.
2 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.
3 Failure to encrypt production data can result in the unauthorized disclosure of
sensitive information.
4 If a backup and disaster recovery plan does not exist, the organization may lose
important data.
5 If the backup plan is not regularly tested, it may not work.
B
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Ch. 14: The Production Cycle
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.
Throughput = A x B x C where
A = total production (units) / processing time
The key data needed are:
total production in units
The AIS can calculate total time by recording 1) the time when the production order was
released and 2) the time when it was completed and the products were placed into
finished goods inventory.
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