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observe with respect to irect materials, the bill of materials may be able to bereuce to +eep raw materials inventory own.

1. "he receipt by cost accounting of the last move tic+et for a batch from the wor+center signals the completion of the prouction process.

11. nventory control, which maintains the recors for the raw materials an finishegoos inventories, shoul be separate from both the raw materials storeroom anfinishe goos warehouse functions. Cost accounting, which maintains the recorsfor wor+ in process, shoul be separate from the wor+ centers in the prouctionprocess.

1!."ransaction authori%ation# 2or+ orers, move tic+ets, an materials reuisitions.*egregation of uties#

1. nventory control separate from 9' an inventory custoy.!. Cost accounting separate from wor+ centers.

$. : separate from other accounting functions. Access# :imit physical access to , 9' stoc+s, an prouction processes. ;seformal proceures an ocuments to release materials into prouction. 1$. Computeraie esign (CA<) involves the use of computers to esign prouctsto be manufacture an the processes by which they are prouce. Computeraiemanufacturing (CA') involves the use of computers to manufacture the prouct.

1. f prouction problems are causing bottlenec+s, then wor+inprocess (26)inventory will ten to accumulate. f the wrong prouct mi& is being prouce, theninventories may buil up while the customers are unhappily waiting for elivery oftheir prouct. nventories may buil up an become obsolete or amage while theyare sitting in storage. urther, prouction has been waste builing the wrongprouct.

1-. "he goal of lean prouction is improve efficiency an effectiveness in everyarea, incluing prouct esign, supplier interaction, factory operations, employeemanagement, an customer relations.

1/. Activities escribe the wor+ performe in a firm, while cost ob0ects are thereasons for performing activities.

17. =ssential activities a value to the organi%ation either through aing value tothe customer or to the organi%ation. >onessential activities o not a value.

18. ?slans of technology@ escribes an environment where moern automatione&ists in the form of islans that stan alone within the traitional setting.

15. Computerintegrate manufacturing (C') is a completely automateenvironment with the ob0ective of eliminating nonvalue ae activities. A C'

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facility ma+es use of group technology cells comprise of various types of computernumerical controlle (C>C) machines to prouce an entire part from start to finish inone location.

!. A company’s value stream inclues all the steps in the process that are essential

to proucing a prouct. "hese are the steps for which the customer is willing to pay.

DISCUSSION QUESTIONS1. "he various wor+ centers sen cost accounting complete move tic+ets.

Along with stanars provie by the stanar cost file, move tic+ets enable costaccounting to upate the affecte 26 accounts with the stanar charges formanufacturing overhea ('4). "he receipt of the last move tic+et for a particularbatch signals the completion of the prouction process an the transfer of prouctsfrom 26 to the finishe goos inventory. At that point cost accounting closes thewor+inprocess account an increases finishe goos.

!. 1. "he assumption that eman for the prouct is +nown with certainty isnot unreasonable for most firms. *ome firms will have better estimates than others,but overall pro0ecting eman for a prouct is not unreasonable. Assuming that theeman is constant is unreasonable for many proucts. At the very e&treme,Christmas items are highly seasonal, as are many recreational items such ascamping gear, hi+ing gear, suntan lotion, an snows+iing euipment. 'anyinustries’ proucts woul violate the assumption of constant eman.

!. "he lea time is +nown an constant. "his assumption is not toounrealistic. "raing partner arrangements between customer an supplier reucesleatime uncertainty. n some cases, a probability istribution woul be better.

$. "he assumption that the total cost of placing orers is inversely relateto the uantities orere (larger orers means fewer orers place) is nottroublesome.

. "he assumption that all inventories in the orer arrive at the same timeis probably not realistic an coul cause shortages.

-. "he assumption that no uantity iscounts e&ist is e&tremelyunrealistic. 'ost firms give uantity iscounts.

/. "he assumption that the total yearly carrying costs is a variable thatincreases as the uantities orere increases in not troublesome.

$. "his is the point where total costs are minimi%e. n other wors, it is theminimum of total holing costs plus total carrying costs.

. "he cost accountants nee to +eep the recors for 26 inventory files. "heyalso nee to trac+ labor, material, an overhea variances, an proviemanagement with these reports so that they may ma+e any necessary a0ustments."he wor+ centers shoul not be allowe to trac+ their own variances, as they mighttry to cover them up rather than fi& them.

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-. By prenumbering source ocuments an referencing these in the 26recors, every item of inventory can be trace bac+ through the prouctionprocess to its source. "his process is important for etecting errors in prouction anfor trac+ing batches through the prouction process.

/. "he general leger epartment provies inepenent verification byreconciling 26 0ournal vouchers from cost accounting an summaries of theinventory subsiiary leger from inventory control.

7. "he following features characteri%e the worlclass company#

• 2orlclass companies must maintain strategic agility an be able to turn ona ime. "op management must be intimately aware of customer nees annot become rigi an resistant paraigm change.

• 2orlclass companies motivate an treat employees li+e appreciatingassets. "o activate the talents of everyone, ecisions are pushe to thelowest level in the organi%ation. "he result is a flat an responsive

organi%ational structure.• A worlclass company profitably meets the nees of its customers. ts goal is

not simply to satisfy customers, but to positively elight them. "his is notsomething that can be one once an then forgotten. 2ith competitorsaggressively see+ing new ways to increase mar+et share, a worl class firmmust continue to elight its customers.

• "he philosophy of customer satisfaction permeates the worl class firm. All ofits activities, from the acuisition of raw materials to selling the finisheprouct, form a ?chain of customers.@ =ach activity is eicate to serving itscustomer, which is the ne&t activity in the process. "he final ?paying@customer is the last in the chain.

• inally, manufacturing firms that achieve worlclass status, o so byfollowing a philosophy of lean manufacturing. "his involves oing more withless, eliminating waste, an reucing prouction cycle time.

8. By replacing labor with automation, a firm can reuce waste, improveefficiency, increase uality, an improve fle&ibility. =&amples of automation inclue#

Automate *torage an 9etrieval *ystems, 9obotics, Computer Aie <esign(CA<), Computeraie manufacturing (CA').

5. *tuents will present ifferent answers to this uestion. or e&ample# *econ*+in *wimwear in Boca 9aton, loria igiti%es the image of the customer, which is

then isplaye on the computer screen. "he customer, with the ai of a salesperson,then tries various swimsuits on the screen, ma+ing any esire changes. <ifferentfabrics are also e&amine. nce a suit is ecie upon, a pattern is automaticallyprepare an cut for manufacturing. "hus, the customer basically esigns her ownswimsuit. *ome car manufacturers allow customers to a on their options via acomputer screen by which they can visuali%e the results of ifferent options. ncethe customer places an orer, the orer is sent to the manufacturer an the car iscustomfinishe. 2eyerhauser, a lumber company, has place +ios+s in some of its

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retailers’ stores which allow customers to buil their ec+s, with the ai of asalesperson. nce the ec+ is rawn with the help of a CA< program, the customermay have a printout of hisher ec+ along with a bill of materials.

1. :ow price, poor uality raw materials can en up costing the firm more

money if more scrap is prouce ue to ifficulty of wor+ing with the raw material. Also, poor uality raw materials or labor will most probably result in the prouction of an inferior goo an ultimately tarnish the firm’s reputation.

11. "he problem is that manufacturing performance is not given enoughemphasis by traitional cost accounting techniues, an traitional cost accountingtechniues o not support the ob0ectives of lean manufacturing firms. irstly,traitional cost accounting systems o not accurately trace costs to proucts anprocesses. "his results in prouct cost istortions, which can ultimately cause poorecisions regaring pricing, valuation, an profitability. *econly, stanar costingmotivates nonlean behaviors through the performance measures of personal

efficiency of prouction wor+ers an effective utili%ation of manufacturing facilities."his promotes the prouction of large batches of proucts an a builup ofinventory. A thir problem is the time lag between the reports generate by the costaccountants an the actual manufacturing activities. 'anagers nee to +now in realtime about a robotic machine, which is proucing suboptimal wor+. :astly, theaccounting ata uses ollars as the stanar unit of measure between items that arenot always amenable to a ollar measure, such as prouct uality, elivery time, setup time, etc. Attempting to force this ata into such a common financial measuremay istort the problem an promote ba ecisions.

1!. "he ABC process moel provies critical information about cost rivers anperformance measures. "his information can be use to constantly analy%e therelative efficiency of activities an the resources use in the process in orer tobetter manage the activities an resources an target areas for cost reuction.

1$. n the traitional manufacturing environment, irect labor is a much largercomponent of total manufacturing costs than in the C' environment. verhea, onthe other han, is a far more significant element of cost in avance technologymanufacturing.

1. "he use of stanar costs provies a type of access control. By specifying theuantities of material authori%e for each prouct, the firm limits usage. "o obtaine&cess uantities reuires special authori%ation an e&cess materials reuisitions. 1-. A Dalue *tream 'ap (D*') is use to graphically represent a businessprocesses to ientify aspects of it that are wasteful an shoul be remove. A D*'ientifies all of the actions reuire to complete processing on a prouct, along with+ey information about each action item. *pecific information may inclue total hourswor+e, overtime hours, cycle time to complete a tas+, an error rates. "he D*'shows the total time reuire for each processing step, the time reuire between

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steps, an ientifies the types of time spent between steps such as the outbounbatching time, transit time, an inboun ueue time.

1/. ABC allows managers to assign costs to activities an proucts moreaccurately than stanar costing permits. *ome avantages that this offers are#

•

'ore accurate costing of prouctsservices, customers, an istributionchannels• entifying the most an least profitable proucts an customers

• Accurately trac+ costs of activities an processes.

• =uip managers with cost intelligence to rive continuous improvements.

• acilitate better mar+eting mi&

• entify waste an nonvalue ae activities.

17. ABC has been critici%e for being too time consuming an complicate forpractical applications over a sustaine perio. "he tas+ of ientifying activity costsan cost rivers can be a significant unerta+ing that is not complete once anthen forgotten. As proucts an processes change so o the associate activitycosts an rivers. ;nless significant resources are committe to maintaining theaccuracy of activity costs an the appropriateness of rivers, cost assignmentsbecome inaccurate. Critics charge that rather than promoting continuousimprovement, ABC creates comple& bureaucracies within organi%ations that are inconflict with the lean manufacturing philosophies of process simplification an wasteelimination.

18. "raitional accounting systems o not accurately trace costs to proucts anprocesses. ne conseuence of new technologies is a change relationshipbetween irect labor an overhea costs. n the traitional manufacturingenvironment, irect labor is a much larger component of total manufacturing coststhan in the C' environment. verhea, on the other han, is a far more significantelement of cost in avance technology manufacturing. n this setting, traitionalcost accounting proceures are inaeuate. or traitional allocations to be correct,a irect relationship between labor an technology nees to e&ist. n C', thisrelationship is iametric rather than complementary. 2hen the cost pool is large anthe allocation metho ambiguous, any miscalculation in assigning labor is magnifiemany times in the calculation of overhea.

15. 'ost organi%ations prouce more than one prouct, but these often fall intonatural families. 6rouct families share common processes from the point of placing

the orer to shipping the finishe goos to the customer. Dalue stream accountingcuts across functional an epartmental lines to inclue costs relate to the prouctfamily such as mar+eting, selling e&penses, prouct esign, engineering, materialspurchasing, istribution, an more, but ma+es no istinction between irect costsan inirect costs.

!. '96 evolve into large suites of software calle enterprise resourceplanning (=96) systems. *imilarities in functionality between =96 an '96

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. a. ne problem is that the wor+ orer is not sent irectly to the costaccounting epartment, but rather to the wor+ centers. "hus, no separation ofcustoial an recor+eeping tas+s occurs. A possible anger is that wor+ orersmay be manipulate or lost. A corrective proceure is to have the wor+ orer sent

irectly to the cost accounting epartment.b. A secon problem is that the wor+ centers generate their own materialreuisitions, e&cess material reuirements, an material returns ocuments. "hewor+ centers shoul not have both custoy over raw materials an thecorresponing authori%ation responsibilities. A possible anger is that the wor+centers may pilfer raw materials an be able to cover it up by altering ocuments. Acorrective proceure is to have the inventory control epartment generate theseocuments an have the cost accounting epartment maintain the 26 recors.

-. Jey elements of this central manufacturing system are#

• 6rouction 6lanning an control prouce the prouction scheule base upon

the monthly sales forecast on file in the central computer system• "he central system prouces wor+ orers, material reuisitions, move tic+ets,

an purchase orers base upon store stanars an inventory on hanata.

• 6urchase orers are sent irectly to suppliers (this coul be via mail, fa&, or=<).

• 2or+ centers access their wor+ scheules an necessary ocuments fromterminal in the wor+ areas. 'inimal har copy is prouce.

• 2hen wor+ is complete wor+ center employees enter the time an materialsuse in prouction.

• *tore+eeping issues raw material to employees as nee. "hey access the

central system to ownloa the materials reuisitions, which the employeessign in e&change for the materials.

• "he central system calculates 26 an automatically transfers 26 tofinishe goos inventory when prouction is complete.

• Cost accounting receives management report on eman from the system viatheir epartment.

• 6urchasing receives management reports on proucts orere via theepartment terminal.

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/. "he avantages are that no efective units will be prouce whenever aproblem is etecte. <efective units are problematic in most inustries, butespecially so in the toy inustry for tolers. Although the prouction line is shutown, costs may still be save in the longrun from less waste, fewer unsalableproucts, an fewer prouct litigation cases. "he problems are that the switchover toa E" system reuires a lot of training an patience. "he prouct must be proucein small lot si%esK the firm may nee to a0ust to get use to this practice. "he firm

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must have e&cellent cooperation from its suppliers. :ate eliveries or elivery ofefective raw materials can cost the company early ue to owntime, since noe&cess inventory is store. =mployee cooperation an teamwor+ must be obtaine,an this usually ta+es time for a0ustment. Fuality must be in the front of everyone’smin.

7. verhea components for the company inclue e&ecutive salaries, legale&penses, orering costs, accounting an other support epartment costs, 0anitorialservices, electricity, plant, property an euipment costs, inventory hanlinge&penses, saw blaes, scrap or waste isposal costs, glue, san paper, mineral oil,pac+aging supplies, an shipping costs.

An activity river for cutting coul be lumber suare feetK the most logical activityriver for the assembly, shaping, saning, an finishing processes woul be thenumber of cutting boars mae. An activity river for pac+ing coul be the number of bo&es pac+e.

8. 9esponse# "he essay shoul inclue the following points#

Pull processi!. 6roucts are pulle from the consumer en (eman), notpushe from the prouction en (*upply). "hey are pulle into prouction ascapacity upstream becomes available. ;nli+e the traitional push process, lean oesnot create batches of semi finishe inventories at bottlenec+s.

Per"ec# $u%li#&. *uccess of the pull processing moel reuires %ero efectsin raw material, wor+ in process, an finishe goos inventory. 6oor uality is verye&pensive to a firm. n the traitional manufacturing environment, these costs canrepresent between !- to $- percent of total prouct cost. Also, uality is a basis onwhich worlclass manufacturers compete. Consumers eman uality an see+ thelowestprice uality prouct.

W%s#e 'ii'i(%#io. All activities that o not a value an ma&imi%e theuse of scarce resources must be eliminate. "he following are e&amples of waste intraitional environments#

L verprouction of proucts,L "ransportation of prouctsL Bottlenec+s of proucts waiting to move to the ne&t prouction step.L le wor+ers.L nefficient motion of wor+ers who must wal+ more that necessary in the

completion of their assigne tas+sL slans of technology.L 6rouction efects that reuires unnecessary effort to inspect anor

correctL *afety ha%ars that cause in0uries an lost wor+ hours an associate

e&penses

I)e#or& re*uc#io. "he hallmar+ of lean manufacturing firms is their

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success in inventory reuction. :ean firms have only a few ays or sometimes evena few hours of inventory onhan. "he three common problems outline belowe&plain why inventory reuction is important.

1. nventories cost money. "hey must be transporte throughout the factory,

hanle, store, an counte. n aition, inventories lose value throughobsolescence.

!. nventories camouflage prouction problems. Bottlenec+s an capacityimbalances in the manufacturing process cause wor+inprocess inventory tobuil up at the cho+e points. nventories also buil up when customer orersan prouction are out of sync.

$. 2illingness to maintain inventories can precipitate overprouction.Because of setup cost constraints, firms ten to overprouce inventories inlarge batches to absorb the allocate costs an create the image of improve

efficiency.

Pro*uc#io "le+i,ili#&. :ong machine setup proceures cause elays inprouction an encourage overprouction. :ean companies strive to reuce setuptime to a minimum, which allows them to prouce a greater iversity of prouctsuic+ly, without sacrificing efficiency at lower volumes of prouction.

Es#%,lis-e* Supplier rel%#ios. A lean manufacturing firm must haveestablishe an cooperative relationships with venors I >o late eliveries,efective raw materials, or incorrect orers.

Te%' A##i#u*e. :ean manufacturing relies heavily on the team attitue of allemployees involve in the process. =ach employee must be vigilant of problems thatthreaten the continuous flow operation of the prouction line. :ean reuires aconstant state of uality control along with the authority to ta+e immeiate action

INTERNAL CONTROL CASES1. *olution to >autilus 2ater 6umps, nc.

a., b., .# *ee iagrams on the pages that follow.

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c. nternal Control 2ea+nesses1. 6rouction scheuling is performe in the 2or+ Center rather than through aformal 6rouction, 6lanning an Control phase. "his leas to lac+ of coorination,internal inefficiencies, material orering problems, an bottlenec+s.

!. >o stanars for material usage are in place an no means for accounting for unuse materials or e&cess material usage in prouction e&ists in the currentsystem. Controls over the flow of raw materials nee to be implemente.

$. A blan+et orer from each automobile manufacturer is receive at the start ofthe year, which is guarantee for only one month. >autilus’s material suppliers, onthe other han, currently reuire three months leatime. <ealing with incongruitywill reuire coorination within >autilus’s supply chain. "hus, in aition to resolving

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the >autilus’s internal prouction problems, the company will benefit by entering intotraing partner agreements with suppliers that will reuire implementation of =< an'96 technologies. (=< is iscusse in etail in chapter 1!.)

!. *olution to *AA ly ishing, nc.

a., b., .# *ee iagrams on the following pages.

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c. nternal Control 2ea+nesses'any changes ha to be mae to the conversion cycle at *AA, nc. to ensureaeuate control proceures in accorance with *A* 78. "hey also ha to increase

the amount of computer technology to spee prouction an reuce paper wor+.'any control wea+nesses e&ist in this case beginning with inaeuate

Au#-ori(%#ios. nly one wor+ orer is prouce in the 6rouction 6lanning anControl <epartment, an it is sent to the wor+ centers. >o file is +ept in the 66MC<epartment. "his means that the epartment has no recor of any wor+ that theyauthori%e, an therefore no control over the wor+ centers. Also there is no nventoryControl <epartment to provie aeuate authori%ation for the reuisition of

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materials.

A serious lac+ of Se!re!%#io o" .uc#ios e&ists at *AA, nc. >o nventoryControl epartment e&ists an that causes the biggest problems. "he *tore+eepingan inishe oos warehouse +eeps inventory recors. "hey also +eep physical

custoy of the C< players. *ince these are highprice items that are relativelysmall, the incentive for employees to steal pieces of inventory is present. t woul bevery easy for anyone, li+e 'r. 4olt, to remove a piece of inventory an alter therecors. Another problem is that 'r. Brac+enbury heas the wor+ centers as well asthe 6rouction 6lanning an Control epartment. "his gives him the opportunity toalter or create false prouction ocuments without anyone +nowing. f he getsbonuses at the en of the year, he may have an incentive to commit frau.

Super)isio is not a serious problem in the wor+ centers because foremen whooversee the usage of raw materials are alreay present an the 0ob tic+ets antimecars are accurate. "he new computer system installe at *AA, nc. will help

with the inaeuate supervision in the other epartments. 6asswors an limiteaccess control shoul be implemente to etail who can amen certain ocuments. Also, new computer programs that calculate inventory reuirements, upateinventory recors, an calculate variances ensure that someone in that epartmentoes not create false recors.

Access Co#rols are especially neee in the *tore+eeping epartment at *AA,nc. irst, the aition of an nventory Control epartment will eliminate access to theraw materials by people with access to the accounting recors an vice versa. Also,bages an security coes between each epartment will cut own on the numberof unauthori%e people in the various epartments. "he new computer system willensure that only the specifie amount of material is sent to the wor+ centers. "oobtain e&cess uantities woul reuire special approval by the nventory Controlcler+.

"he new system has a mar+e increase in the number of Accou#i! Recor*Co#rols. t starts with prenumbere source ocuments. "his way missingocuments can be trac+e own an the ability to create false ones is greatlyreuce. >e&t, an increase in the number of ocuments e&ists, strengthening theauit trail. our wor+ orers are now prouceNtwo going to the wor+ centers, oneto Cost Accounting, an one to an open wor+ orer file. "his file also lets the6rouction 6lanning an Control epartment +now what orers are still in progress.

Another move tic+et is create going to the wor+ center an bac+ to 66MC to closeout the open wor+ orer file along with the prouction scheule. Another materialsreuisition is create that eventually goes to Cost Accounting. 2ith this increase inthe auit trail, more epartments will have a recor of the 26, ma+ing it harer tocommit frau.

inally, I*epe*e# Veri"ic%#io has also increase uner this new system. Cost Accounting, now receiving more accounting recors, can more easily reconcile the

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materials use with the material reuisitions, 0ob tic+ets, an wor+ orers. "hey canthen come up with more accurate variances that point out any irregularities in theprouction process. f someone is changing the amount or cost of materials while atthe same time changing the cost or time of labor use, a total variance may not pic+up the ifference. :abor, overhea, an materials variances will point out any large

ifferences though. inally, the nventory Control epartment must ma+e perioiccounts of the inventory on han an reconcile it with their recors.

. "his organi%ation can benefit by creating an nventory Controlepartment an automating the inventory upate an inventory level chec+proceures as illustrate in the revise iagrams. "he iagram also illustrates otherareas where automation may be beneficial.

$. *olution to eneral 'anufacturing, nc.a., b. *ee the iagrams on the following pages.

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c. nternal Control 2ea+nesses

Production' nees to increase super)isio in the wor+ center. 'i+e oes not watchemployees closely enough, which ma+es it easy to fabricate the amount of time theyspen wor+ing.

"he lac+ of e&cess materials an materials return ocuments represents%ccou#i! recor* an %ccess co#rol problems. nventory is not properlyrecore because e&cess raw materials are left aroun the wor+ center epartment.

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"his gives employees easy access to the raw materials an may tempt employeesto steal the raw materials.

' also has a se!re!%#io o" "uc#ios problem since the store+eeping aninventory control epartments are combine. "he same person has access to both

the raw material an finishe goos inventory an the authority to upate theinventory recors. "his ma+es it easy for an employee to steal finishe goos anraw materials from '. ' will nee to brea+ up the inventory epartment intostore+eeping an inventory control epartments.

Cost Accounting "he cost accounting epartment has several control problems. "he lac+ of e&cessmaterial an material return ocuments ma+e it ifficult for the accountingepartment to verify that the numbers they are receiving are correct. >oi*epe*e# )eri"ic%#io of the 26 an inventory occurs since they o nothave the ocuments to prove it.

' has a se!re!%#io o" "uc#ios epartment control problem since the costaccounting an general leger epartments are combine. "his is a problem sinceno general leger inepenent verification step e&ists. "he same person has controlof the cost accounting recors an the general leger. >o i*epe*e# )eri"ic%#ioof the 0ournal vouchers prepare by the cost accounting epartment occurs since thesame person reconciling them upates the general leger.

. "his organi%ation can benefit from an integrate computer systemwhich uses batch processing of time cars an time tic+ets. "he materials reuisitioncan be use to initiate the automatic preparation of the wor+ orer an move tic+ets."he move tic+ets shoul be use to upate the wor+ in process at each wor+ station.

. Solu#io #o Bu'per C%rs/ L#*0 ("his case an solution was prepare byEulie isch an 'elina Bowman, :ehigh ;niversity.)

All three suggestions offer vali solutions for inventory problems uner certainconitions. 4owever, some of the solutions wor+ better than others in the case ofBumper Cars, :t. 'r. erris’s plan to hire more wor+ers in the prouctionepartment is the least plausible solution for this company. "he reasonably low costof implementing this plan, an the fact that it allows training of new wor+ers proviestwo avantages of this solution. 4owever, the list of isavantages greatly outweighsthese few avantages. irst of all, if the company must continually hire an firewor+ers, training costs an hiring costs will s+yroc+et. Also, the wor+ers willconstantly worry about the possibility of unemployment. ;nhappy wor+ers with lowmorale ten to wor+ less efficiently, therefore prouction ecreases espite thegreater number of wor+ers. A thir isavantage involves the fact that the prouctionepartment is not the source of the problem. A company shoul ma+e improvementsirectly to the area that causes the problem, which in this case is the inventorycontrol epartment.

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's. Coaster’s plan to hire more people to help in the inventory control epartmentoffers a more logical solution. By implementing such a plan, the problem woul beattac+e at its source. "he unerstaffe inventory epartment comprises one of themost significant problems of the company. =ach wor+er has too manyresponsibilities, an therefore they perform each tas+ in a highly inefficient manner.

4iring more people woul alleviate some of these responsibilities, thereby freeingthe employees to concentrate on performing fewer 0obs more effectively. n aition,this solution generates minimal e&tra costs an solves many problems with onesimple solution. 2ith the new wor+ers, low inventory will be iscovere anrestoc+e before a lag in prouction occurs. n the other han, this solution has itsisavantages also. "he main problem revolves aroun the fact that hiring morewor+ers in the inventory control epartment offers no future benefits for the companyin terms of the company e&pansion. As the company e&pans, more an morewor+ers will be necessary to +eep trac+ of inventory, thus incurring high cost tobenefit ratios. 2hile the e&tra wor+ers benefit the inventory control an prouctionepartments, they offer no solutions for the problems that will evelop in the other

epartments as a result of the e&pansion. "herefore, this solution may be use as ashort term remey for the immeiate inventory problem, but it shoul not be incluein the long range plans of the company.

6ossibly the best solution of the three suggeste at the company meeting is 'r.lume’s plan to implement a companywie computer system. "his solution wouleffectively meet the nees of the e&paning company by coorinating all theepartments an reucing manual labor problems. All operations woul becomemore efficient an effective with the installation of an overall system. "his solution isnot without its rawbac+s, however. irst of all, as 'r. Amusement suggeste, thecost of such a system is too e&cessive for a small company. Between research,implementation, maintenance, an repairs, the company woul spen all its profits

0ust to +eep the system in orer. At some point in the future, the company willprobably brea+ even, then continue to ma+e money as the benefits of the computerset in, but the losses incurre in the immeiate future might cause the company tofol before the system can ta+e hol. n conclusion, a companywie system mightbe a future consieration, but at the present, this solution is impractical.

After weighing the avantages an isavantages of the above solutions, the bestsolution is probably for this company to implement a small scale computer systemimplemente in the inventory control, purchasing, an prouction epartments. "hissystem woul +eep trac+ of low inventory an contact the purchasing epartmentwhen reorering is necessary. "he system woul also be connecte to theprouction epartment, thus allowing the prouction epartment to immeiatelyconvey their prouction nees to the inventory control epartment where thesenees can be met. Also, because the system is not implemente companywie, thecost is not e&cessive. n aition, the company has the option to improve an a tothe system later as the company’s e&pansion reuires. "he system coul bee&pane to inclue the accounting an finance epartments, an possibly evenmar+eting an evelopment epartments. "herefore, in the short run, the small scale

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system solves the company’s immeiate inventory problems. n the long run, thissystem provies opportunities for e&pansion with the business. As new problemsarise ue improve business, the company can easily revise the system to meet itsnees. 'ost importantly, the cost of such a system is not e&cessive in the short run.

-. Solu#io #o Bl%*es 1R2 Us3Co'pre-esi)e C%sea., b., . *ee iagrams on the pages that follow.

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c. nternal Control 2ea+nesses

E+pe*i#ure C&cle Co#rol Issues4SEGREGATION OF FUNCTIONS

• ne of the problems with Blaes O9’ ;s concerns the manner in which theinventory recors are upate in the nventory <epartment. As is e&plaine,'r. *ampson uses the purchase orer he receives from 's. Connolly to

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upate the recors. "his current system is relying on the confience that thesupplier will ship the goos promptly, with the right uantity, an without anyefects. "here is never any use of the receiving report by the nventory<epartment to upate recors.

• 'r. <resen shoul not have the ability to loo+ over the recors to write the

chec+s an also be able to write an sign the chec+s off. n this case 'r.<resen is e&ercising too much control over an important part of the Accounts6ayable <epartment.

ACCOUNTING RECORDS

• 's. Connoly has also committe another error in not printing up a ?blin copy@of the purchase orer to be sent to the Accounts 6ayable <epartment. "hisblin copy woul allow for further reconciliation on the ocuments so thateverything that was orere was receive. Again, this company has too muchreliance on the supplier that what they are sening is accurate an complete.

SUPERVISION • ;nfortunately, when 'r. 4iro receives the goos he never truly inspects the

goos to ma+e sure everything is correct. 'r. 4iro ta+es the pac+ing slipnumbers as correct an legitimate. 4e never oes the physical count, whichis so important.

• 'r. <resen has a lot of control when he is ealing with the chec+s. 4e hasthe ability to write the chec+s an sign for them as well. 2ithout appropriatesupervision, 'r. <resen coul be writing out chec+s to fa+e companies anmerely upating the eneral :eger with the fa+e account summaries.

• 'r. *ampson in the nventory <epartment also nees to have someonechec+ing his actions. 4e coul easily manipulate the purchase orers coming

through the warehouse enabling him to steal goos from the inventoryepartment.

AUTHORIZATION

• "he immeiate authori%ation control issue is 'r. <resen’s hanling of thechec+s. Again, he has too much control over the writing an signing of thechec+s before they are istribute to the suppliers. inclue this controlissue with supervision as well because believe that it pertains to both ofthese issues.

ACCESS CONTROL

• 'r. *ampson in the nventory <epartment has access to the inventoryrecors as well as access to the actual inventory. 2ith this ?power@ it woul beeasy for 'r. *impson to commit frau against the company.

Co)ersio C&cle Co#rol Issues4 AUTHORIZATION

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• >o 'ove "ic+etsN"here are no authori%ation activities for the movement ofprouct between wor+ centers.

• >o =&cess 'aterial <ocumentNf a wor+ center nees more material they onot nee any special permission to get it.

SEGREGATION OF FUNCTIONS • >o *tore+eeping <epartmentN"he nventory Control <epartment maintains

the recors for the inventory an has custoy of the inventory.• 'aterial 9euisitions ssue by 2or+ CentersN"he wor+ centers issue

material reuisitions whenever they nee materials instea of the prouctionplanning an control epartment.

SUPERVISION

• *upervision is necessary in the wor+ centers to +eep trac+ of the prouctsan the raw materials an be sure they are not being stolen or misplace.

• "he foreman shoul ma+e sure that the payroll time cars are accurate.

ACCOUNTING RECORDS

• >o Eob "ime "ic+etsN"here are no 0ob time tic+ets sent to cost accounting toverify the time spent on each 0ob.

• >o 6renumbere ormsN"he forms use for all the paperwor+ are notprenumbere, ma+ing it ifficult to account for all the paper wor+.

ACCESS CONTROL

• "he company nees to limit the access employees have to the areas wherematerials an proucts are store.

•

Allowing the wor+ centers access to unlimite inventory by allowing them toreuest inventory at their iscretion e&hibits a problem with access control.

/. Solu#io #o Au#o'o#i)e Co'poe#s Corpor%#io3A Ac#i)i#& B%se*Cos#i! C%se

Automotive Components Corporation has e&perience some une&plainableownturns in the past few years. "heir margins have been lagging, yet theyconsistently obtain the business for which they have been gearing up theirmanufacturing operationsNnamely the low volume parts which the auto ma+ershave been emaning. "he controller cannot e&plain this phenomenon, but has

attene a seminar recently where he learns that other companies which have beenin the same preicament implemente ABC with success.

Cos# Dri)ersortunately, ACC’s overhea ha been bro+en own effectively before the controllerhas recently become intereste in ABC. "his is fortunate because now all that is leftfor the core team to o is etermine the secon stage cost rivers which trace costfrom the activity cost pools to each of ACC’s proucts. "he interviews the core team

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conucte, as well as the iscussion they provie, offer the reaer enoughinformation to etermine which secon stage cost rivers woul best trace costs toproucts. "he specific rivers selecte are not the most important point to ta+e awayfrom this case, but rather the funamental theory of resource consumption. "hefollowing iscussion is provie by iscussing a specific solution to the problems

outline in the case. "he case reaers may choose a ifferent approach, yet stillprovie sufficient iscussion to support their conclusions.

=ngineeringN"he engineering activity is iscusse by the prouct engineer, *ally*ummers. *he believes that engineering’s activity is consume by the number ofcomponents per part. "his occurs in other companies as wellK the engineeringactivities in a company are prouctrelate activities. n other wors, they are notepenent on the uantity of prouct prouce. At ACC, it ta+es essentially thesame amount of time to esign a low volume part as a high volume part. "herefore,the cost river for the engineering activity is the number of components per part. "henumber of components is an estimate of part comple&ity. 4ence, an assumption is

mae that engineering costs increase as the comple&ity of the part increases.

nspectionNEim *chmit iscusses the inspection activity cost pool. 4e notices thatthe inspection activity has not ecline since ACC began focusing on low volumecomponents. 4e iscusses the first run inspections performe at ACC an notes thatthey are epenent on how many runs a prouct has. nspection, in ACC’s case is abatch activity an the cost river is the number of runs per prouct.

'aterial 'ovementN"he core team’s first interview is Eohn ?Bull@ Aams, thesupervisor in charge of material movement. Bull tells the team that the materialmovement activity is riven by the number of feet move per run. "his means thatthis activity is riven by two factors, the number of runs an the number of feetmove. "he river is therefore the number of feet move times the number of runs, abatch activity. "he material movement activity is not influence by part volume. Alarge batch reuires the same amount of resources as a small batch. "his is asimplification for the case. Actually, other factors may e&ist which influence materialmovement such as weight or hanling reuirements.

*etupN"he ne&t interview is with the most e&perience 0obsetter, *ara >ightingale.*ara tells the team that she believes the setup activity is still riven by the setup timereuire per batch. *ara amits that with the introuction of the C>C machines forprouction, the wor+loa has been reuce for the 0obsetters, but the final assemblysetups are still hanle by mechanically e&perience 0obsetters. "he setup activityis a batch activity an shoul be riven by the setup time reuire per batch. *ince*ara points out the fact that 0obsetters are becoming more technical an theprogramming of C>C machines reuires a ifferent type of wor+, a cost river whichincorporates new prouct introuctions or prouct changes may be appropriate.

*hippingN"he final interview is conucte with 6hil Eohnson, the shippingsupervisor. 4e believes that the activity of the shipping epartment is epenent on

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the number of shipments. "his is a prouct activity. "he amount of resourcese&pene on shipping is epenent on the number of shipments per prouct. "heshipping cost of a prouct is a function of the number of shipments reuire by thecustomer.

'achinesN"he activity cost pool name machines shoul be riven by the machinehours consume per part. "his is a unit cost because it occurs to every unitprouce.

ABC COSTSigure 1 isplays ACC’s new activitybase cost system. =ach of the activity costpools are trace to proucts using a ifferent cost river. 2ith this new system, ACChas the ability to ifferentiate between parts of varying comple&ity within their CA*.

6art comple&ity is a function of#machine hours per part,

components per part,runs per part,istance move per part,setup time per run per part, anshipments per part.

"he current CA* allocates the total manufacturing overhea base on eachprouct’s consumption of irect labor. "he new ABC system traces manufacturingoverhea to proucts in two stages. "he first stage traces costs from themanufacturing overhea to the activity cost pools ientifie in igure 1. "he seconstage traces cost from those activity cost pools to iniviual proucts base on thecost rivers also shown in igure 1. =ach of ACC’s three proucts are calculateusing the new ABC system in igure !.

"hese new costs are rastically ifferent than the costs compute by the currentCA* system. "his phenomenon of transactions within each part consumes aifferent proportion of transactions within each activity cost pool. =ach prouct’sproportion of transaction consumption is shown in igure $. "his figure illustrateswhy ACC’s current CA* oes not prouce accurate prouct costs. By observing thenew activitybase system, it is clear that prouct 11 is the most comple& prouctprouce by ACC. "his small volume prouct is the transaction leaer in four out ofthe si& activity cost pools. 6rouct 1! an 1$ are not as comple& an reuiresignificantly less transaction volume.

ACTIVITY5BASED COST VERSUS ACC2S CURRENT COST SYSTEM A graph emonstrating the variation between the prouct cost compute with thecurrent CA* an the new activitybase system is shown in igure . As you cansee, the current system significantly unercosts prouct 11 an overcosts proucts1! an 1$. igure - illustrates that current CA* significantly unerallocatesoverhea cost to prouct 11 an overallocates cost to prouct 1! an 1$.

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