Harvard University

AIS 101

Chapter 7-The Conversion Cycle

TRUE/FALSE

1)The philosophy of customer satisfaction permeates the world-class firm.

2. Reports generated by the cost accounting system include performance reports and budget reports.

3. The cost accounting system authorizes the release of raw materials into production.

4. Batch processing creates a homogeneous product through a continuous series of standard procedures.

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.

6. A purchase requisition authorizes the storekeeper to release materials to individuals or work centers in the production process.

7. The SAP R/3 system organizes business processes into four categories: financial, logistics, human resources, and business process support.

8. The objective of the Economic Order Quantity model is to reduce total inventory costs by minimizing carrying costs and ordering costs.

9. The work-in-process file is the subsidiary ledger for the work-in-process control account.

10. Move tickets authorize the storekeeper to release materials to work centers.

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.

12. Computer Integrated Manufacturing focuses on reducing the complexity of the physical manufacturing layout of the shop floor.

13. The only objective of the Just-In-Time philosophy is to reduce inventory levels.

14. Accounting in a world-class manufacturing environment emphasizes standard cost and variance analysis.

15. Identifying cost drivers is an essential step in implementing the Just-In-Time philosophy.

16. A world class information system produces very little paper.

17. Internal control procedures are virtually identical in a world-class manufacturing environment and in a traditional manufacturing environment.

18. In a world-class company, all activities, from acquisition of raw materials to selling the final product, form a “chain of customers.”

19. The two subsystems of a traditional conversion cycle are the production system and the delivery system.

20. Manufacturing resources planning (MRP II) has evolved into electronic resource planning (ERP).

MULTIPLE CHOICE

1. Which item does not describe a world-class company?
   1. the goal of a world-class company is to delight its customers
   2. customers in a world-class company are external departments only
   3. world-class companies work in cross-functional teams
   4. a world-class company has a flat organizational structure
2. Which subsystem is not a part of the production system?

2. 1. directing the movement of work through the process
   2. determining raw material requirements
   3. authorizing work to be performed
   4. monitoring the flow of cost information related to production
3. The purpose of the cost accounting system is to
   1. produce information for inventory valuation
   2. authorize release of raw materials
   3. direct the movement of work-in-process
   4. determine material requirements
4. Which process creates a homogeneous product through a continuous series of standard procedures?
   1. batch process
   2. make-to-order process
   3. continuous process
   4. none of the above
5. An example of a continuous process is the production of
   1. wedding invitations
   2. milk products
   3. jet aircraft
   4. all of the above
6. All of the following are characteristics of batch processing except
   1. each item in the batch is similar
   2. batches are produced in accordance with detailed customer specifications
   3. batches are produced to replenish depleted inventory levels
   4. setting up and retooling is required for different batches
7. When determining which items to produce, a firm must know
   1. last year’s production level
   2. raw material inventory levels
   3. the standard cost of the item
   4. the sales forecast
8. The production schedule is
   1. the expected demand for the firm’s finished goods for a given year
   2. the formal plan and authority to begin production
   3. a description of the type and quantity of raw materials and subassemblies used to produce a single unit of finished product
   4. the sequence of operations during manufacturing

9. A move ticket
   1. is the formal plan and authority to begin production
   2. specifies the materials and production required for each batch
   3. records the work done in each work center
   4. authorizes the storekeeper to release materials to work centers
10. The internal control significance of the excess materials requisition is that it
    1. indicates the amount of material released to work centers
    2. identifies materials used in production that exceed the standard amount allowed
    3. indicates the standard quantities required for production
    4. documents the return to raw materials inventory of unused production materials
11. Inventory control performs all of the following tasks except it
    1. provides production planning and control with the inventory status report of finished goods
    2. updates the raw material inventory records
    3. prepares a materials requisition for each production batch
    4. records the completed production as an increase to finished goods inventory
12. The storekeeper releases raw materials based on the
    1. production schedule
    2. materials requisition
    3. work order
    4. bill of materials
13. Which of the following is not an assumption of the Economic Order Quantity model?
    1. demand for the product is known with certainty
    2. total cost per year of placing orders is fixed
    3. lead time is known and is constant
    4. there are no quantity discounts
14. Firms hold safety stock to compensate for
    1. mathematical weaknesses of the Economic Order Quantity model
    2. variations in lead time or daily demand
    3. fluctuations in carrying costs
    4. uncertainty in the estimation of ordering costs
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

16. If the daily demand is 40 units and the lead time is 12 days, the reorder point is
    1. 52 units
    2. 48 units
    3. 480 units
    4. none of the above
17. Which statement is not correct?
    1. general ledger creates a new cost record upon receipt of a work order from production planning and control
    2. cost accounting updates the cost record with data gathered from the materials requisition
    3. general ledger posts summary information about the manufacturing process based on a journal voucher prepared by cost accounting
    4. cost accounting computes variances and applies overhead to individual cost records
18. Which of the following is not a category of critical success factors in most manufacturing companies?
    1. product quality
    2. customer service
    3. revenue generation
    4. resource management
19. Computer integrated manufacturing groups all of the following technologies except
    1. robotics
    2. materials requirements planning
    3. automated storage and retrieval systems
    4. computer aided design
20. The SAP R/3 system provides pre-defined modules to support business processes in the all of the following categories except
    1. human resources
    2. business process support
    3. strategic
    4. financial
21. Which situation violates the segregation of functions control procedure?
    1. production planning and control is located apart from the work centers
    2. inventory control maintains custody of inventory items
    3. cost accounting has custody of and makes entries on cost records
    4. work centers record direct labor on job tickets
22. All of the following are internal control procedures that should be in place in the conversion cycle except
    1. calculation and analysis of direct material and direct labor variances

22. 2. retention of excess materials by work centers
    3. physical count of inventory items on hand
    4. limited access to raw material and finished goods inventories
23. Process simplification focuses on
    1. using Computer Numerical Controlled machines which stand alone within a traditional setting
    2. completely automating the manufacturing environment
    3. reducing the complexity of the physical manufacturing layout of the shop floor
    4. organizing the process into functional departments
24. A manufacturing process that is organized into group technology cells utilizing no human labor is called
    1. islands of technology
    2. process simplification
    3. Computer Integrated Manufacturing
    4. traditional manufacturing
25. An example of automation of manufacturing design is
    1. Computer Aided Engineering
    2. Automated Storage and Retrieval Systems
    3. Computer Numerical Control
    4. robotics
26. An example of automation of manufacturing planning is
    1. Computer Aided Engineering
    2. Automated Storage and Retrieval Systems
    3. Materials Requirements Planning
    4. Computer Numerical Control
27. Firms implement a Just-In-Time inventory approach to
    1. reduce investment in inventories
    2. determine the optimum inventory level using the EOQ model
    3. camouflage production problems
    4. ensure overproduction of inventory
28. Characteristics of Just-In-Time manufacturing include all of the following except
    1. push manufacturing
    2. zero defects
    3. reduced setup time and small lot sizes
    4. reliable vendors

29. The cost of poor quality includes all of the following except
    1. cost of rework
    2. warranty claims
    3. scheduling delays
    4. proceeds from the sale of scrap
30. A flexible manufacturing system
    1. creates bottlenecks in the process
    2. leads to an “us” versus “them” attitude among workers
    3. shortens the physical distance between activities
    4. is organized along functional lines
31. Deficiencies of the traditional cost accounting information system include all of the following except
    1. an emphasis on financial performance
    2. inaccurate cost allocations
    3. an emphasis on standard costs
    4. immediate feedback about deviations from the norm
32. Which statement is not correct?
    1. an activity driver is a means to measure the activity used by the cost object
    2. cost object describes the work performed in a firm
    3. activities cause costs
    4. cost objects create a demand for activities
33. Firms are adopting Activity Based Costing (ABC) because
    1. it facilitates the analysis of variances
    2. it more accurately allocates costs to products
    3. it recognizes the importance of direct labor as a component of total manufacturing cost
    4. the financial nature of the reports permits comparisons to be made among different types of products

34. In traditional firms, information reporting
    1. provides financially oriented information relating to operations
    2. presents detailed information about activities
    3. shows the allocation of costs first to activities and then to cost objects
    4. identifies nonessential activities
35. Types of information provided by Activity Based Costing include
    1. a description of the single activity driver used for overhead application
    2. the dollar value of the direct material usage variance
    3. identification of cost drivers
    4. details of the components of the single overhead cost pool

36. Which statement is not correct?
    1. the benchmark approach compares key activities with similar activities in other firms
    2. critical success factors include product and process quality
    3. the ABC model includes two perspectives: an allocation of cost perspective and a process perspective
    4. in world-class manufacturing firms, quality control activities at the end of the process are essential

37. All of the following are documents in batch process production systems except
    1. production schedule
    2. route sheet
    3. materials requisition
    4. purchase order
38. Transaction authorization occurs in a traditional manufacturing environment in all of the following ways except
    1. production planning and control initiates production with a work order
    2. movement of the work through the production process follows the move ticket
    3. the sales department modifies work orders to match changes in demand
    4. the materials requisition authorizes the storekeeper to release materials to the work centers
39. Manufacturing flexibility incorporates four characteristics. These include all of the following except
    1. high product quality
    2. high inventory levels
    3. automation of manufacturing processes
    4. physical reorganization of production facilities
40. The stages of the automation continuum are (in order)
    1. traditional, computer-integrated manufacturing, islands of technology, process simplification
    2. process simplification, traditional, islands of technology, computer-integrated manufacturing
    3. traditional, islands of technology, process simplification, computer-integrated manufacturing
    4. traditional, process simplification, computer-integrated manufacturing, islands of technology

SHORT ANSWER

1. Which type of manufacturing creates a homogeneous product through a continuous series of standard procedures?

2. What information is contained in the bill of materials (BOM)?

3. What is the difference between a materials requisition and a purchase requisition?

4. List one authorization control in the traditional manufacturing environment.

5. Explain how Just-In-Time inventory affects setup time and lot size.

6. What is one benefit of the flexible production system?

7. List two disadvantages of using a traditional cost accounting system.

8. In Activity Based Costing, what is the term used to refer to the work performed by a firm?

9. In Activity Based Costing, the activity cost is assigned to the cost object by means of

                                                                .

10. Explain benchmarking.

11. Provide a specific example of source data automation.

12. In a traditional manufacturing environment, cost accounting provides independent verification of what information? What are the benefits?

13. How are cost structures fundamentally different between the traditional and CIM environments?

14. What are the key segregation of duties issues in the conversion cycle?

15. Traditional accounting assumes that products cause costs. ABC assumes that                                       

cause costs.

16. Differentiate between essential and non-essential activities.

17. Name the underlying assumptions of the JIT method.

18. What document signals the completion of the production process?

19. What document triggers the beginning of the cost accounting process for a given production run?

20. Name five documents associated with batch production systems.

ESSAY

1. What are the accounting implications when a firm moves toward world-class status?

2. Contrast the treatment of inventories in the traditional manufacturing environment and the world-class manufacturing environment.

3. Discuss the key segregation of duties that should exist in the traditional manufacturing environment.

4. What are the four categories of business processes as defined as modules by SAP R/3? Explain.

5. How can a world-class information system yield a paperless environment?

6. How does MRP II (manufacturing resource planning) expand on MRP (materials requirements planning)?

7. Name and explain the five categories of critical success factors.

8. MRP II integrates product design and the production process with order entry, accounting. and activity based costing. What are some of the benefits?

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.

10. The text discusses the “evils of inventory.” What are they? Why are they “evil?”

11. Automation of manufacturing can be viewed as a progression beginning with the traditional manufacturing environment. What are the stages? What distinguishes them?

12. How can a firm control against excessive quantities of raw materials being used in the manufacturing process.

13. Explain the relationship between MRP, MRPII and ERP.

14. Explain how CAD can contribute to a firm’s move toward world-class status.

15. Explain how CAM can contribute to a firm’s move toward world-class status.

16. Explain why traditional cost allocation methods fail in a CIM environment.

17. Explain how JIT can reduce inventory.