Chapter 14

Accounting Information Systems, 12e (Romney/Steinbart)
Chapter 14 The Production Cycle

1) The AIS compiles and feeds information among the business cycles. What is the relationship between
the revenue and production cycles regarding the exchange of information
A) The revenue cycle provides sales forecast and customer order information to the production cycle!
but the production cycle sends information bac" to revenue about finished goods production.
#) The revenue cycle receives information from the production cycle about raw materials needs.
$) The production cycle sends cost of goods manufactured information bac" to the revenue cycle.
%) The production cycle does not exchange information with the revenue cycle.
Answer& A
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AA$S#& Analytic
0) Which of the following is a "ey feature of materials re1uirements planning 2/('3II)
A) (educing re1uired inventory levels by scheduling production! rather than estimating needs
#) /inimi4ing or eliminating carrying and stoc"out costs
$) %etermining the optimal reorder points for all materials
%) %etermining economic order 1uantity for all materials
Answer& A
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6) The production cycle is different than the revenue and expenditure cycles for all the following reasons
except
A) there are no direct external data sources or destinations.
#) cost accounting is involved in all activities.
$) not all organi4ations have a production cycle.
%) very little technology exists to ma"e activities more efficient.
Answer& A
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AA$S#& (eflective Thin"ing
)) An /(' inventory system reduces inventory levels by
A) reducing the uncertainty about when materials are needed.
#) computing exact costs of purchasing and carrying inventory.
$) delivering materials to the production floor exactly when needed and in exact 1uantities.
%) none of the above
Answer& A
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1
$opyright 7 0*10 'earson 5ducation! Inc. publishing as 'rentice 8all
9) Which of the following is not a product design ob-ective
A) %esign a product that meets customer re1uirements.
#) %esign a 1uality product.
$) /inimi4e production costs.
%) /a"e the design easy to trac" for cost accounting purposes.
Answer& %
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+) The operations list shows
A) the labor and machine re1uirements.
#) the steps and operations in the production cycle.
$) the time expected to complete each step or operation.
%) all of the above
Answer& %
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;) 'ush manufacturing is officially "nown as
A) manufacturing resource planning 2/(').
#) -ust3in3time manufacturing system 2<IT).
$) the economic order 1uantity 25,=) system.
%) ahead3of3time production implementation 2AT'I).
Answer& A
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>) 'ull manufacturing is officially "nown as
A) manufacturing resource planning 2/(').
#) -ust3in3time manufacturing system 2<IT).
$) the economic order 1uantity 25,=) system.
%) ahead3of3time production implementation 2AT'I).
Answer& #
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0
:) What is the main difference between /('3II and <IT manufacturing systems
A) The length of the planning hori4on.
#) <IT uses long3term customer demand for planning purposes! but /('3II uses short3term customer
demand for planning purposes.
$) /('3II relies on 5%I! but <IT does not.
%) There are no significant differences between /('3II and <IT.
Answer& A
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AA$S#& Analytic
1*) A master production schedule is used to develop detailed
A) timetables of daily production and determine raw material needs.
#) reports on daily production and material usage.
$) daily reports on direct labor needs.
%) inventory charts.
Answer& A
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AA$S#& Analytic
11) The production cycle document that specifies the 1uantity of each product to be produced and when
production should begin is the
A) bill of materials.
#) bill of lading.
$) master production schedule.
%) operations list.
Answer& $
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10) What information is necessary to create the master production schedule
A) engineering department specifications and inventory levels
#) engineering department specifications and sales forecasts
$) special orders information and engineering department specifications
%) sales forecasts! special orders information! and inventory levels
Answer& %
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6
16) The document that authori4es the transfer of raw materials from the storeroom to the production
floor is referred to as
A) a bill of materials.
#) a production order.
$) a materials re1uisition.
%) a move tic"et.
Answer& $
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AA$S#& Analytic
1)) ?????? is an efficient way to trac" and process information about raw materials used in production.
A) A -ust3in3time inventory system
#) Identifying materials with bar codes or (@I% tags
$) A materials resources planning inventory system
%) <ob3order costing
Answer& #
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19) The use of various forms of information technology in the production process is referred to as
A) computeri4ed investments and machines.
#) computeri4ed integration of machines.
$) computer3integrated manufacturing.
%) computer intense manufacturing.
Answer& $
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1+) Asing technology such as robots and computer3controlled machinery to shift from mass production
to custom order manufacturing is referred to as
A) computer integrated manufacturing 2$I/).
#) lean manufacturing.
$) Six Sigma.
%) computer3aided design 2$A%).
Answer& A
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)
1;) Which ob-ective listed below is not a cost accounting ob-ective for the production cycle
A) provide information for planning! controlling! and evaluating the performance of production
operations
#) provide cost data about products used in pricing and product mix decisions
$) collect and process the information used to calculate inventory and cost of goods sold amounts that
appear in the financial statements
%) provide tests of audit control functions as part of the AIS
Answer& %
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1>) Which type of information below should not be maintained by the AIS in accounting for fixed
assets
A) identificationBserial number
#) cost
$) improvements
%) mar"et value
Answer& %
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1:) %irect labor must be trac"ed and accounted for as part of the production process. Traditionally!
direct labor was trac"ed using ???????? but an AIS enhancement is to use ???????? to record and trac"
direct labor costs.
A) -ob3time tic"etsC coded identification cards
#) move tic"etsC coded identification cards
$) employee earnings recordsC -ob3time tic"ets
%) time cardsC electronic time entry terminals
Answer& A
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0*) %etailed data about reasons for warranty and repair costs is considered an applicable control used to
mitigate the threat of
A) underproduction.
#) overproduction.
$) poor product design.
%) suboptimal investment of fixed assets.
Answer& $
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9
01) @or replacement of inventories and assets destroyed by fire or other disasters! an organi4ation needs
A) stand3by facilities.
#) ade1uate insurance coverage.
$) source data automation.
%) All of the above are correct.
Answer& #
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00) ,verproduction or underproduction can be a threat to an organi4ation. To which process or activity
does this threat relate
A) product design
#) planning and scheduling
$) production operations
%) cost accounting
Answer& #
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06) What specific control can help restrict the rights of authori4ed users to only the portion of a database
needed to complete their specific -ob duties
A) an access control matrix
#) passwords and user I%s
$) closed3loop verification
%) specific authori4ation
Answer& A
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AA$S#& Analytic
0)) To reduce the threat of theft or destruction of inventories and other fixed assets! the organi4ation
may wish to implement which of the following controls
A) review and approval of fixed asset ac1uisitions
#) improved and more timely reporting
$) better production and planning systems
%) document all movement of inventory through the production process
Answer& %
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AA$S#& Analytic
+
09) The best control procedure for accurate data entry is
A) the use of on3line terminals.
#) an access control matrix.
$) passwords and user I%s.
%) automation of data collection.
Answer& %
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AA$S#& Analytic
0+) Which of the following organi4ation controls should be implemented and maintained to counteract
the general threat that the loss of production data will greatly slow or halt production activity
A) Store "ey master inventory and production order files on3site only to prevent their theft.
#) #ac" up data files only after a production run has been physically completed.
$) Access controls should apply to all terminals within the organi4ation.
%) Allow access to inventory records from any terminal within the organi4ation to provide efficient data
entry.
Answer& $
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0;) The threat of loss of data exposes the company to
A) the loss of assets.
#) ineffective decision ma"ing.
$) inefficient manufacturing.
%) All of the above are correct.
Answer& %
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0>) What is the primary drawbac" to using a volume3driven base! such as direct labor or machine hours!
to apply overhead to products in a traditional cost accounting system
A) The cost accountant may not fully understand how to trac" direct labor or machine hours.
#) It is difficult for an AIS to incorporate such a measurement into its system.
$) It is difficult for an 5(' to incorporate such a measurement into its integrated system.
%) /any overhead costs are incorrectly allocated to products since they do not vary with production
volume.
Answer& %
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;
0:) ???????? identifies costs with the corporationDs strategy for production of goods and services.
A) Activity3based costing
#) <ob3order costing
$) 'rocess costing
%) /anufacturing costing
Answer& A
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6*) In an Activity3#ased $osting 2A#$) system! a cause3and3effect relationship is "nown as a
A) cost stimulator.
#) overhead stimulator.
$) cost driver.
%) cost catalyst.
Answer& $
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61) What does the first term in the throughput formula! productive capacity! represent
A) the maximum number of units that can be produced given current technology
#) the percentage of total production time used to manufacture a product
$) the percentage of EgoodE units produced given current technology
%) the percentage of EbadE units produced given current technology
Answer& A
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60) ???????? are incurred to ensure that products are created without defects the first time.
A) 5xternal failure costs
#) Inspection costs
$) Internal failure costs
%) 'revention costs
Answer& %
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>
66) ???????? are associated with testing to ensure that products meet 1uality standards.
A) 5xternal failure costs
#) Inspection costs
$) Internal failure costs
%) 'revention costs
Answer& #
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6)) The cost of a product liability claim can be classified as a2n)
A) prevention cost.
#) inspection cost.
$) internal failure cost.
%) external failure cost.
Answer& %
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69) %olly Salem owns and operates a ba"ery in $harleston! South $arolina. She maintains a file of
recipes that list the ingredients used to ma"e her famous ca"es and coo"ies. These recipes are examples
of a2an)
#) operations list.
$) production order.
%) materials re1uisition.
Answer& A
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6+) %olly Salem owns and operates a ba"ery in $harleston! South $arolina. She maintains a file that
lists the se1uence of procedures re1uired to ma"e each of her famous ca"es and coo"ies. These
instructions are examples of a2an)
#) operations list.
Answer& #
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:
6;) %olly Salem owns and operates a ba"ery in $harleston! South $arolina. 5ach morning she prepares
a list that describes the 1uantity and variety of ca"es and coo"ies that will be prepared during the day.
This list is an example of a2an)
#) operations list.
Answer& $
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AA$S#& Analytic
6>) %olly Salem owns and operates a ba"ery in $harleston! South $arolina. 5ach afternoon! she
prepares a shopping list that describes the 1uantity and variety of ingredients that she will purchase in
the evening from a local food wholesaler. The shopping list is an example of a2an)
#) operations list.
Answer& %
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6:) Wee #ee Truc"ing determines the cost per delivery by summing the average cost of loading!
unloading! transporting! and maintenance. This is an example of ???????? costing.
A) -ob3order
#) unit3based
$) activity3based
%) process
Answer& %
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AA$S#& Analytic
)*) Wee #ee Truc"ing determines the cost per delivery by averaging total cost over number of
deliveries. This is an example of ???????? costing.
A) -ob3order
#) unit3based
$) activity3based
%) process
Answer& A
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1*
)1) Wee #ee Truc"ing determines the cost per delivery by identifying variables as cost drivers! and
allocating overhead accordingly. This is an example of ???????? costing.
A) -ob3order
#) unit3based
$) activity3based
%) process
Answer& $
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)0) In activity3based costing! expenses associated with the purchase of health care insurance for
employees are ???????? overhead.
A) batch3related
#) product3related
$) companywide
%) expenditure3based
Answer& $
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)6) In activity3based costing! the expenses associated with planning and design of new products are
???????? overhead.
A) batch3related
#) product3related
$) companywide
%) expenditure3based
Answer& #
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AA$S#& Analytic
))) At the end of each production run! preventive maintenance is done on the assembly line. The
expenses associated with this maintenance are ???????? overhead.
A) batch3related
#) product3related
$) companywide
%) department3based
Answer& A
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)9) Which of the following is not a benefit of activity3based costing
A) .ower cost
#) #etter decisions
$) Improved cost management
%) Identification of cost drivers
Answer& A
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)+) The expenses associated with a product recall are ???????? costs.
A) prevention
#) inspection
$) internal failure
%) external failure
Answer& %
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);) The expenses associated with 1uality assurance activities are ???????? costs.
A) prevention
#) inspection
$) internal failure
%) external failure
Answer& #
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)>) The expenses associated with the use of clean rooms in the production of computer hard drives are
???????? costs.
A) prevention
#) inspection
$) internal failure
%) external failure
Answer& A
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10
):) The expenses associated with disposal of defective products are ???????? costs.
A) prevention
#) inspection
$) internal failure
%) external failure
Answer& $
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AA$S#& Analytic
9*) .abor productivity is measured by the 1uantity produced divided by the labor time re1uired to
produce it. All other things held constant! an increase in labor productivity will increase throughput by
A) increasing productive capacity.
#) increasing productive processing time.
$) increasing yield.
%) increasing all components of throughput.
Answer& A
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AA$S#& Analytic
91) In addition to identifying and dealing with defective products before they reach customers! 1uality
management is concerned with initiating process changes that will reduce the number of defective units
produced. All other things held constant! a decrease in the number of defective units will increase
throughput by
Answer& $
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AA$S#& Analytic
90) @olding S1uid Technologies has installed a new production monitoring system that is expected to
reduce system brea"downs by 0>F. This system will increase throughput by
Answer& #
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AA$S#& Analytic
16
96) $lint Smith operates a machine shop in #urban"! $alifornia. 8e places bids on small lot production
pro-ects submitted by firms throughout the .os Angeles area. Which of the following is most li"ely to be
a cost driver for the allocation of utility costs
A) Gumber of units produced
#) Gumber of labor hours
$) Gumber of pro-ects completed
%) Sales revenue
Answer& $
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9)) @olding S1uid Technologies initiated a -ust3in3time inventory system in 0*1*. Gow the production
manager! $han Hiaou! wants to apply the same principles to the entire production process. 8is
recommendation is for the company adopt a
A) lean manufacturing system.
#) master production scheduling system.
$) manufacturing resource planning system.
%) computer3integrated manufacturing system.
Answer& A
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AA$S#& Analytic
99) This document appears to be a
A) /aterials (e1uisition.
#) 'roduction ,rder.
$) #ill of /aterials.
%) /ove Tic"et between production and warehouse functions.
Answer& A
'age (ef& )10
1)
9+) 8ow many side panels should the company budget for use in wee" two
#ill of /aterials
Finished Product: DD Player
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)&**
;&1*
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Answer& +** 20 per finished unit x 6** units scheduled to be produced)
'age (ef& )10
AA$S#& Analytic
19
9;) 8ow many labor hours should the company budget in wee" three to produce all side panels needed
(ound to the nearest hour! if necessary.
#ill of /aterials
Finished Product: DD Player
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Answer& 016 hours 2209.99 minutes per finished unit x 0 panels per finished unit x 09* units scheduled
to be produced)B+* minutes per hour )
'age (ef& )10
AA$S#& Analytic
1+
9>) Identify and discuss the two documents that are the result of product design activities.
Answer& The two documents that are the result of product design activity are the bill of materials and
the operations list. The bill of materials specifies the part number! description! and 1uantity of each
component used in a finished product. The operations list specifies the labor and machine re1uirements
needed to manufacture the product. The operations list is sometimes also called a routing sheet! since it
indicates how a product moves through the factory.
'age (ef& )1*
AA$S#& Analytic
9:) 5xplain what $I/ means and its benefits.
Answer& $I/ is the acronym that stands for computer integrated manufacturing. It incorporates various
forms of information technology in the production process such as the use of robots and computer3
controlled machinery. The benefit of $I/ is that it can significantly reduce production costs.
'age (ef& )1+
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AA$S#& Analytic
+*) What types of data are accumulated by cost accounting What is the accountantDs role in cost
accounting
Answer& There are four types of cost data accumulated in a cost accounting system& raw materialsC
direct laborC machinery and e1uipmentC and! manufacturing overhead. The role of the accountant is to
control costs by assessing how product mix changes affect total manufacturing overhead and by
identifying factors that drive changes in costs.
'age (ef& )1>
AA$S#& Analytic
+1) What role does the AIS play in the production cycle
Answer& A company Ds AIS plays a vital role in the production cycle. Accurate and timely cost
accounting information is essential input to decisions about the following& 'roduct mix 2what to
produce)! 'roduct pricing! (esource allocation and planning 2e.g.! whether to ma"e or buy a product!
relative profitability of different products)! $ost management 2planning and controlling manufacturing
costs! evaluating performance). These decisions re1uire much more detailed information about costs
than the data needed to prepare financial statements in accordance with generally accepted accounting
principles 2IAA'). Thus! the design of a company Ds production cycle AIS must go beyond merely
meeting external financial reporting re1uirements.
'age (ef& )*+
AA$S#& Analytic
1;
+0) %iscuss the role the accountant can play in the production cycle.
Answer& The accountant can play a role and provide meaningful input into each area of the production
cycle. Accountants should participate in product design since +9 to >*F of product costs are determined
at this stage of the production process. Accountant analysis of cost behavior and variations in product
design can prove invaluable to the organi4ation in this stage of production. In the planning and
scheduling stage! accountants can help a company choose whether /('3II or <IT is more appropriate
for planning and scheduling. The accountant also should verify that the AIS collects and reports costs in
a manner consistent with the production planning techni1ues it has chosen to use. In production
operations! the accountant should develop a wor"ing "nowledge of $I/ in order to understand its effect
on the AIS. The accountant will also be integrally involved with the cost accounting system! whether it
is a traditional cost accounting system or an activity3based cost accounting system. Accountants can
provide excellent insight into the cost aspect of the production process! which is "ey to the profitability
and success of the organi4ation.
'age (ef& )*+
,b-ective& .earning ,b-ective )
AA$S#& Analytic
+6) Identify and discuss the two common methods of production planning.
Answer& The two common methods of production planning are manufacturing resource planning 2/('3
II) and -ust3in3time 2<IT!) or lean! manufacturing.
/('3II see"s to balance the existing production capacity and raw materials re1uired to meet forecasted
sales demand. /('3II systems are referred to as push manufacturing! since products are made in
expectation of customer demand.
<IT manufacturing see"s to minimi4e or eliminate inventories of raw materials! wor" in process! and
finished goods. A <IT manufacturing system only produces a product in response to customer demands.
<IT systems are called pull manufacturing systems! since goods are produced only in response to
customer demands.
'age (ef& )11
AA$S#& Analytic
1>
+)) What are the two ma-or types of cost accounting systems and what are the differences between the
two
Answer& /ost companies will use either -ob3order or process costing to assign production costs in the
production of products. <ob3order costing is designed to assign costs to specific production batches! or
-obs 2hence the name E-ob3orderE). It is used in a production process where a product is specifically!
discreetly identifiable 2such as a custom3built home or office building). It should be noted that -ob3order
costing can also be successfully used in the service sector by law or accounting firms to calculate and
trac" the costs incurred in legal cases and audits! respectively. 'rocess costing differs in that it assigns
costs to each process! or wor" center! in the production cycle! and then averages these costs across the
number of units produced. 'rocess costing is useful whenever similar or homogenous goods are
produced in mass 1uantities! such as laundry detergent! some types of food items! or soft drin"s. $osts
can be assigned at each stage in the production process for these items! and then an average total unit
cost for the product can be calculated based on output. 'rocess costing has also been incorporated by
mutual funds to find the average cost of handling customer deposits and withdrawals.
'age (ef& )1>
AA$S#& Analytic
+9) %escribe five threats in the production cycle and the applicable control procedures used to mitigate
each threat.
Answer&
Threat 1& Anauthori4ed transactions $ontrols& Accurate sales forecasts! maintaining accurate
inventory recordsC authori4ing productionC restricting access to the production planning programC and
review and approval of capital expenditures
Threat 0& Theft or destruction of inventories and fixed assets $ontrols& (estrict physical access to
inventoriesC document internal physical flow of assetsC proper segregation of dutiesC periodic physical
count and reconciliation of inventoryC document and authori4e materials re1uests and disposal of fixed
assetsC and have ade1uate insurance
Threat 6& (ecording and posting errors $ontrols& Automate data collection proceduresC online data
entry edit controlsC and conduct periodic physical inventory and fixed asset counts
Threat )& .oss of data $ontrols& (egularly bac" up filesC "eep additional master filesC use internal and
external file labelsC restrict accessC and "eep logs of all activities
Threat 9& Inefficiencies and 1uality control problems $ontrols& 'repare regular performance reportsC
highlight exception reports and variancesC compare actual performance to budgeted performanceC
measure throughputC and measure the cost of 1uality control
'age (ef& )*:
AA$S#& Analytic
1:
++) %iscuss two measures that can address the threats of inefficiencies and 1uality controls problems.
Answer& Throughput represents the number of good 2nondefective) units produced in a given period of
time. It consists of three factors! 2productive capacity! productive processing time! and yield)! each of
which can be separately controlled as shown in the formula& Throughput J 2total units
producedBprocessing time) x 2processing timeBtotal time) x 2good unitsBtotal units). Knowing about
1uality costs can help companies determine the effects of actions ta"en to improve yield and identify
areas for further improvement. The main ob-ective of 1uality control is to minimi4e the sum of the four
types of costs recogni4ing the trade3offs between costs. These costs are& prevention costs! inspection
costs! internal failure costs! and external failure costs.
'age (ef& )06
AA$S#& Analytic
+;) %iscuss the criticisms of traditional cost accounting methods.
Answer& There can be an inappropriate allocation of overhead costs. The factors contributing to this
problem are& A volume3driven form used for activity3driven overhead costs assigned to products.
,verhead cost is either over3 or understated due to allocation method used. The system may distort costs
across products! especially if manufacturing is highly automated and performance measures do not
accurately reflect the effects of factory automation& /easures collected are not integrated with
performance measures. .ac" of information about standard costs! variance! and functioning of
production process. .ac" of information about defect rates! brea"down fre1uency! percentage for
finished goods completed without rewor"! etc.
'age (ef& )06
+>) What is activity3based costing 2A#$) 8ow does it compare with the traditional costing methods
What are the benefits of activity3based costing
Answer& Activity3based costing 2A#$) traces costs to the activities that created them and then allocates
those costs to products or shipments thereby lin"ing the costs to a corporate strategy. A#$ versus
traditional cost systems& A#$ attempts to directly trace most costs to products! A#$ uses more cost
pools to accumulate manufacturing overhead instead of lumping all overhead costs together as in the
traditional approach. @or example& 1) #atch3related overhead results in larger 1uantities having lower
batch3related costs than smaller 1uantitiesC 0) 'roduct3related overhead results in costs being allocated to
only the product2s) that are lin"ed to the costC and 6) $ompany3wide overhead results in such overhead
costs 2e.g.! rent) being allocated based on department or plant rates. A#$ uses cost drivers that have a
cause3and3effect relationship on the products in order to allocate the costs instead of using the traditional
financial variables. Advantages of A#$ systems& #etter decisions because can be made with an A#$
system because product cost data is more accurate and data is used to improve product design. Improved
cost management is seen due to four reasons& 1) There are clearer measures of managerial actions on
profitability. 0) The consumption of resources is measured in addition to the amount spent on ac1uiring
resources. 6) The cost of activity capability J $ost of activity used L $ost of unused capacity. ))
'erformance reports help direct managerial attention to the effect of policy decision on all costs.
'age (ef& )0*3)01
AA$S#& Analytic
0*

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Accounting Information Systems, 12e (Romney/Steinbart)

Chapter 14 The Production Cycle

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