Chapter 11 Solutions Conversion Processes and Controls
11-1
Turner/Accounting Information Systems, 2e
Solutions Manual
Chapter 11
Concept Check
1. d
2. d
3. c
4. c
5. a
6. c
7. c
Discussion Questions
16. (SO1) What are the three resources that an organization must have to conduct a
conversion (or transformation) process? The three resources are materials, labor,
and overhead.
17. (SO1) Does a conversion process occur in manufacturing companies only? Why or
why not? All companies have a conversion process. That is, all companies use
18. (SO1) Why are conversion activities typically considered routine data processes?
19. (SO2) Differentiate between a bill of materials and an operations list. The bill of
materials is a list of materials and components that are ingredients to manufacture a
20. (SO2) Differentiate between the role of engineering and the research and
development department. Research and development focuses on improvement of
Chapter 11 Solutions Conversion Processes and Controls
11-2
21. (SO2) What are the two types of documents or reports are likely to trigger the
conversion process? A sales order or a sales forecast would trigger the conversion
process. Manufacturing would not be started until a need for products was
documented on either a sales order or sales forecast.
22. (SO2) What are the three primary components of logistics? They are planning,
23. (SO2) What types of information must be taken into consideration when scheduling
production? The information that should be considered includes all open sales
orders, inventory needs, and resources available.
24. (SO2) Differentiate between a routing slip and an inventory status report. A routing
25. (SO2) What are the conversion responsibilities of the maintenance and control,
inventory control, inventory stores, and human resources departments?
26. (SO2) What is the purpose of an inventory status report? An inventory status report
documents the extent of work completed and the levels of inventory at the various
stages of completion.
27. (SO2) What is the overall goal of the inventory control department? Its purpose is to
manage and record the movement of materials and inventory throughout the
production process.
28. (SO2) What is the purpose of the Quality Control department? The purpose is to
29. (SO3) What is the purpose of determining standard costs? Standard costs are used
30. (SO3) What should be done when unfavorable variances are discovered? These
Chapter 11 Solutions Conversion Processes and Controls
11-3
31. (SO3) Why would perpetual inventory records be preferable to periodic inventory
records in a manufacturing company? With perpetual inventory records,
32. (SO4) Which three activities in the conversion process should require specific
authorization before they are begun? The three processes that should require
specific authorization are: initiation of production orders; issuance of materials to
production; and transfer of finished goods.
33. (SO4) Why is it important to separate the functions of inventory control and the
production stations? What could go wrong if these functions were not separated?
34. (SO4) Why is it so important that variance reports be prepared in a timely manner?
35. (SO4) Explain how a physical inventory count would be used differently by a
company using a perpetual inventory system vs. a period inventory system. In a
36. (SO5) When IT systems are used in conversion processes, what are some of the
resulting advantages to the organization? There are often gains in productivity and
flexibility, with reductions in time and cost. Also, IT systems often integrate
processing applications, planning, resource management, operations, and cost
accounting. This increases workforce efficiency and reduces paperwork and costs.
37. (SO5) How can programmed controls within the IT system for conversion processes
enhance internal controls? There are several ways that programmed controls
38. (SO5) What is the difference between CAD, CAM, and CIM? CAD is computer
aided design. By using the computer in the design process, it becomes more
effective ad efficient. CAM is computer aided manufacturing. I usually involves
Chapter 11 Solutions Conversion Processes and Controls
11-4
39. (SO5) What is the difference between MRP, MRP-II, and ERP? All three are
software systems. MRP is materials requirement planning and it is used to plan,
coordinate and track materials in a manufacturing process. MRP II is manufacturing
40. (SO6) How can conversion processes be manipulated to show higher earnings?
Cost accounting uses absorption costing in which fixed overhead is applied to units
produced. When excess units are produced, these excess units become part of
Brief Exercises
41. (SO1) Consider a company that is in the business of producing canned fruits for
grocery stores. (It is not in the business of growing the fruit.) List the items that
would likely be included as this company’s direct materials, direct labor, indirect
materials, and other overhead.
The direct materials would be many different kinds of fruits such as pineapple,
peaches, grapes, cherries, pears, and mandarin oranges. The direct materials could
42. (SO2) Give some examples of manufacturing processes that would fit into each of
the three different types of production processes: continuous processing, batch
processing, and custom made-to-order.
Chapter 11 Solutions Conversion Processes and Controls
11-5
manufacturing such as i-pods, power generation as in coal-fired plants.
Examples of batch manufacturing might be: wine making, gasoline production,
prescription pill production. Many things that could be continuous production might
also be made in batches for convenience or efficient use of machinery. For
example, equipment to bottle soft drinks might be used for a few hours to bottle a
batch of Pepsi, then be cleaned and set to produce a batch of Mountain Dew.
43. (SO2) List and describe each activity within the Planning component of the Logistics
function.
Planning includes: research and development, capital budgeting, engineering, and
scheduling. Research and development is the design of new products, or the
redesign of existing products to improve the existing products. Capital budgeting is
44. (SO2) Some companies use the same facility for both inventory stores and
warehousing. Describe the difference between these two inventory control activities,
and how the respective areas might be distinguished within the facility.
Inventory stores usually is the term used for raw materials or components used as
inputs to manufacture products. A warehouse is the storage location for finished
45. (SO2) For the following activities within the conversion process, place them in
sequence that indicates the order in which they would normally be performed:
• Preparation of a production schedule
• Preparation of a bill of materials
Chapter 11 Solutions Conversion Processes and Controls
11-6
46. (SO 2, 3) Describe the purpose of each of the following cost accounting records or
reports:
a. Work-in-process and finished goods inventory accounts. Both are
inventory accounts to track the amount of goods in process and the
47. (SO3) Describe how a cost accountant would cancel a production order upon
completion of the related product. Why is this important?
The documentation for the order, called the production order, should be marked in a
manner to show it is complete. For example, a cost accountant might sign a
48. (SO4) When taking a physical inventory count at a typical manufacturing facility,
which category of inventory (raw materials, work-in-process, or finished goods) is
likely to be the most time-consuming to count and determine the relevant costs?
Why?
Work-in-process is likely to be the most time consuming. This is because the work–
49. (SO4) Identify several factors that indicate the need for more extensive internal
controls covering conversion processes.
The factors include: the number of products made; the value or size of products
Chapter 11 Solutions Conversion Processes and Controls
11-7
value.
50. (SO5) Match the IT systems on the left with their definitions on the right:
CAD –
b
a. A network including production equipment, computer terminals,
and accounting systems.
CAM –
g
b. Electronic workstation including advanced graphics and 3–D
modeling of production processes.
MRP –
f
c. Automated scheduling of manufacturing resources, including
scheduling, capacity, and forecasting functions.
d. The minimization of inventory levels by controlling production so
products are produced on a tight schedule in time for their sale.
ERP –
e
f. Automated scheduling of production orders and materials
movement.
a
g. Production automation, including use of computers and robotics.
processing.
Problems
51. (SO2) Suppose a company has 1,000 units of a raw material part on hand. If 750 of
these units are routed into production, should the company place an order to stock
up on more of these parts? In order to answer this question, determine the
economic order quantity (EOQ) for this part assuming that:
a. the company plans to use 10,000 units during the coming year
52. (SO4) Suppose a company is experiencing problems with omitted transactions in the
conversion process; i.e., inventory transactions are not always being recorded as
they occur. Use Exhibit 7-7 to describe at least three internal controls that should be
in place to help alleviate such problems.
Chapter 11 Solutions Conversion Processes and Controls
11-8
automation using robotics. Describe some of the robotic operations that are
featured on the company’s website.
FANUC Robotics America is the leading supplier of robotic automation in the US.
They provide robotics for assembly, packing, parts transfer, material removal,
54. (SO5) Using an Internet search engine, search for the terms “just in time” +
“automotive”. Based on the results you find, explain why just in time inventory
systems are such an important factor in the competitive automotive industry.
Just-in-time production systems are intended to be efficient methods to produce
cars, but yet maintain smaller inventories of the various parts and pieces needed to
produce a car. Under a just-in-time system, the parts are delivered to the production
floor right at the time they are needed. It saves companies the cost of storing and
moving these parts and can save related costs such as insurance and taxes on
inventories. It is part of the entire philosophy of “lean manufacturing” that increases
manufacturing efficiency and reduces costs.
55. (SO6) Explain how the over-production of inventories can be seen as unethical in an
absorption costing environment.
In absorption costing, fixed overhead is allocated to each unit of inventory. Thus,
Chapter 11 Solutions Conversion Processes and Controls
11-9
56. (SO6) Price discounts are commonly used in the business world as incentives for
customers. How is it that this practice (or its misuse) may be deemed unethical?
57. SO3) Texas Bar Supply manufactures equipment for bars and lounges. While the
company manufactures several different products, one product is a blender that
bartenders use to make certain kinds of drinks. Using information in a spreadsheet
58. (SO 5) Using an Internet search engine, locate a publication entitled “RFID
Journal”. Find a recent article that describes the use of RFID in manufacturing.
Briefly describe the example(s) discussed in the article.
This answer will vary tremendously depending on the article chosen by the
student. As of the July 2012, a recent article described the use of RFID tags at
New Sunshine, a manufacturer and distributor of tanning lotion products sold to
Chapter 11 Solutions Conversion Processes and Controls
11–10
Cases
59. Compton Falls Enterprises documentation and internal controls..
Required:
a. Draw a process map of the conversion processes at Compton Falls
Enterprises. Refer to the separate Microsoft Excel file “Chapter 11 Solutions
STRENGTHS
When a production schedule is prepared, the quantities of raw materials are
check and if needed, a purchase requisition is prepared.
The initiation of the purchase requisition is segregated from Purchasing.
WEAKNESSES
Henry Prayne, in the stores department, has custody of inventory and the
record keeping responsibility for inventory. The record keeping responsibility
should be assigned to someone who does not have authorization or custody
of inventory.
Chapter 11 Solutions Conversion Processes and Controls
11–11
and then prepare a materials requisition based on these quantities.
Berta Aler has custody of inventory as the supervisor, and is also responsible
to lessen the chances or errors or fraud.
d. Describe any benefits that Compton Falls may receive by installing newer IT
systems within its conversion processes. Be specific as to how IT systems
could benefit each of the processes described, or how they could eliminate
any weakness identified per c. above. IT systems could enhance Compton
Falls’s IT system. If the conversion process components were integrated, the
related inventory and personnel records could be maintained online. This
would enable job cards to be automatically prepared from time cards, so the
reconciliation would be conducted by the system. In addition, an
60. Bokka Ski Line, Inc. documentation and internal control weaknesses.
Required:
a. Draw a process map of the conversion processes at Bokka. Refer to the
separate Microsoft Excel file “Chapter 11 Solutions Documentation.xls”.
b. Draw a document flowchart showing the records used in Bokka’s conversion
processes. Refer to the separate Microsoft Excel file “Chapter 11 Solutions
Chapter 11 Solutions Conversion Processes and Controls
11–12
production process. Improvement: Ideally, the authorization to begin
production should be segregated from those doing or managing the
iv. Weakness: Job cards are not reconciled to time cards. Improvement:
Cost accounting should reconcile to lessen the chances or errors or fraud.
v. Weakness: There is no mention of an inventory subsidiary ledger.
Improvement: An inventory subsidiary ledger should be maintained by
someone who does not have authorization or custody functions within
61. Brock Footwear, Inc. and automated systems.
Required:
a. List the problems with the existing system at Brock. The problems are late
deliveries to customers, delayed production, out-of-stock and back–
ordered materials, inventory and production records that are not up–to–
date, and an inability to accurately predict delivery dates for customers.
b. Identify the relevant information that the production and inventory
managers need to accumulate in order to support the decision to
automate the conversion process. The relevant information would be
proposed automated systems that would lessen these problems, the
estimated costs and benefits of these systems, and the time necessary to
Chapter 11 Solutions Conversion Processes and Controls
11–13
c. List specific items that could be provided by an automated system, and
describe how this would be essential to the company’s continued success.
The items that could be provided by an automated system are:
i. A record-keeping system that could be real-time. Changes in
inventory could be recorded as they occur. This single feature
would dramatically lessen all the problems described in the case.
ii. Fewer human errors in an automated system. Inventory records
will become more accurate with an automated system. There are
many reasons that an automated system would reduce errors.
First, manual record keeping and posting would be eliminated.
Second, certain types of IT systems could eliminate keying of
information and any keying errors. For example, bar code or RFID
iii. Labor savings from eliminating or reducing manual steps.
iv. More accurate, timely, and flexible feedback information to
management. Automated systems will provide more timely reports
and these reports could be more easily customized to management
needs. The case mentions the week backlog in clerks updating
61. (CMA Adapted) Arbol Dynamics Inc. and ethical issues.
Required:
a. What should Jamie Trogg do? Explain your answer and discuss the ethical
considerations that she should recognize in this situation. (Since this is
adapted from a CMA question, you might wish to direct students to the
Chapter 11 Solutions Conversion Processes and Controls
11–14
of the competing interests involved. There is a disclosure issue that might
suggest that the board should know about the defects. There is also the
opposite side that it is not possible or practical to bring every defect issue to
the board of directors. The ethical conflict involves how and who should
in how she proceeds. While she may be an expert in the cost aspect of
manufacturing the chips, she would know less about how the board of
directors is informed of things and the impact the negative report could have
on the board of directors. Thus, she may need to do further investigation of
the negative impact of the defects. Once she is clear that she has correct
information, her first step should be to meet with her supervisor, the
controller, to discuss why she believes the board should have her report. She
should provide a fully documented report of why she believes the board
is not the correct person to be making the decision about which information
the board should have, but she can be an advocate for her report as she
works up the chain of management. The IMA guidelines do not support
taking any such ethical conflict to parties outside the company unless there is
a clear violation of the law. In addition, Jamie can call the IMA’s confidential
ethics counselors for guidance on how to proceed. If the company does have
b. What corporate governance functions are missing at Arbol? Be specific and
describe the facts of the case and their relevance to corporate governance.
There is no mention in the case of a code of ethics. A good code of ethics
might help guide the upper management, or Jamie as they consider these
Chapter 11 Solutions Conversion Processes and Controls
11–15
ethical issues. The case does no give enough detail to truly assess the
aspect of tone at the top. The ethical tone or example set by the board of
directors and upper managers is a very important part. It is possible that
the board of directors and top management had set out some objectives and
guidelines of how they wish to operate ethically, it would help all involved in
the ethical conflict to know how to proceed. It may also set an environment in
which lower level managers such as the plant manger would know that upper
level managers would be disappointed in his performance if he did not bring
forth such issues. That is, what kind of behavior does the board and top
management encourage and reward? The tone at the top sets the