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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
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?
Production Cycle
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.
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.
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
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.
9. _f__ Job-order costing
i. A document that tracks the transfer of inventory
from one work center to another.
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.
Production Cycle
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
planning personnel and perhaps factory supervisors.
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.
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:
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
Production Cycle
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
usage and investigate any material differences
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
equipment.
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
and customer orders, taking into account inventory on hand.
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
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?
Production Cycle
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
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.
6
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.
result in poor product design or excessive costs of production and inventory.
11
Failure to trace warranty and repair costs to specific finished products
precludes correcting poor product designs.
12
Without a Master Production Schedule, unauthorized production orders
could result in over-production of finished goods. There could also be
underproduction of finished goods.
13
Failure to document transfer of raw materials from inventory stores can lead
to theft.
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
B = processing time / total elapsed real time
Total time spent in operations (processing time) can be collected by measuring the time
spent on each operation. This can be most accurately done with badge or card readers at
each station.
Total production can be recorded by counting (with bar-code scanners or using RFID tags
, if possible) all units produced at each step of the manufacturing process.
Subtracting defective units from total production yields good production.
Production Cycle
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.
Ch. 14: The Production Cycle
a. Prepare a data flow diagram of all operations described.
inventory
sales forecasts
Scheduled
Production
MPS
1.0
Plan
Production
QOH
Production Cycle
b. What control procedures should be included in the system?
A large number of controls are possible, including the following:
• Access Control - User ID and Password
• Compatibility Test - Password
• Preformatting or Prompting -All Data Entered
• Record Count - # of Transactions
Ch. 14: The Production Cycle
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.
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:
Investment = $400,000 + $1.5 x 1,000,000 units = $1,900,000.
Option B:
Investment = $50,000 + $3.2 x 1,000,000 units = $3,250,000
Option C:
Investment = $2,000,000
Production Cycle
b. Assume that because all of the proposed changes will increase product quality,
that production will jump to 1,500,000 units. Which option do you recommend?
Why?
At production levels of 1,500,000 units, options B and C both reduce total costs. Option
C, however, reduces them the most.
Option A:
Investment = $400,000 + $1.5 x 1,500,000 units = $2,650,000.
Savings = $2,160,000:
Reduced scrap costs = 40% x 15% x $12 x 1,500,000 units = $1,080,000
Reduced warranty/repair costs = 40% x 3% x $60 x 1,500,000 units =
$1,0800,000
Option B:
Option C:
14.7 EXCEL PROBLEM
a. Create the following spreadsheet
Production Cycle
b. Create formulas to calculate
• Accumulated depreciation (all assets use the straight line method; all assets acquired any time during the year get
a full year’s initial depreciation)
• Current year’s depreciation (straight-line method, full amount for initial year in which asset acquired)
c. Create a table at the bottom of your worksheet that consists of two columns:
• Asset name (values should be chair, desk, laptop, monitor, software, and workstation)
d. Enter your name in row 1 in the cell to the right of the text “Name”
