Chapter 7—The Conversion Cycle

TRUE/FALSE

1. The philosophy of customer satisfaction

permeates the world-class firm.

ANS: T

2. Reports generated by the cost accounting system

include performance reports and budget reports.

ANS: T

3. The cost accounting system authorizes the release

of raw materials into production.

ANS: F

4. Batch processing creates a homogeneous product

through a continuous series of standard procedures.

ANS: F

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.

ANS: T

6. A purchase requisition authorizes the storekeeper

to release materials to individuals or work centers in

the production process.

ANS: F

7. The SAP R/3 system organizes business processes

into four categories: financial, logistics, human

resources, and business process support.

ANS: T

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.

ANS: T

10. Move tickets authorize the storekeeper to

release materials to work centers.

ANS: F

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.

ANS: T

12. Computer Integrated Manufacturing focuses on

reducing the complexity of the physical

manufacturing layout of the shop floor.

ANS: F

13. The only objective of the Just-In-Time philosophy

is to reduce inventory levels.

ANS: F

14. Accounting in a world-class manufacturing

environment emphasizes standard cost and variance

analysis.

ANS: F

15. Identifying cost drivers is an essential step in

implementing the Just-In-Time philosophy.

ANS: F

16. A world class information system produces very

little paper.

ANS: T
17. Internal control procedures are virtually identical

in a world-class manufacturing environment and in a

traditional manufacturing environment.

ANS: F

18. In a world-class company, all activities, from

acquisition of raw materials to selling the final

product, form a “chain of customers.”

ANS: T

19. The two subsystems of a traditional conversion

cycle are the production system and the delivery

system.

ANS: F

20. Manufacturing resources planning (MRP II) has

evolved into electronic resource planning (ERP).

ANS: F

MULTIPLE CHOICE

1. Which item does not describe a world-class

company?

a. the goal of a world-class company is to delight its

customers

b. customers in a world-class company are external

departments only

c. world-class companies work in cross-functional

teams

d. a world-class company has a flat organizational

structure

ANS: B

2. Which subsystem is not a part of the production

system?
a. directing the movement of work through the

process

b. determining raw material requirements

c. authorizing work to be performed

d. monitoring the flow of cost information related to

production

ANS: D

3. The purpose of the cost accounting system is to

a. produce information for inventory valuation

b. authorize release of raw materials

c. direct the movement of work-in-process

d. determine material requirements

ANS: A

4. Which process creates a homogeneous product

through a continuous series of standard procedures?

a. batch process

b. make-to-order process

c. continuous process

d. none of the above

ANS: C

5. An example of a continuous process is the

production of

a. wedding invitations

b. milk products

c. jet aircraft

d. all of the above

ANS: B

6. All of the following are characteristics of batch

processing except
a. each item in the batch is similar

b. batches are produced in accordance with detailed

customer specifications

c. batches are produced to replenish depleted

inventory levels

d. setting up and retooling is required for different

batches

ANS: B

7. When determining which items to produce, a firm

must know

a. last year’s production level

b. raw material inventory levels

c. the standard cost of the item

d. the sales forecast

ANS: D

8. The production schedule is

a. the expected demand for the firm’s finished goods

for a given year

b. the formal plan and authority to begin production

c. a description of the type and quantity of raw

materials and subassemblies used to produce a

single unit of finished product

d. the sequence of operations during manufacturing

ANS: B

9. A move ticket

a. is the formal plan and authority to begin

production

b. specifies the materials and production required

for each batch

d. authorizes the storekeeper to release materials to

work centers

ANS: C

10. The internal control significance of the excess

materials requisition is that it

a. indicates the amount of material released to work

centers

b. identifies materials used in production that

exceed the standard amount allowed

c. indicates the standard quantities required for

production

d. documents the return to raw materials inventory

of unused production materials

ANS: B

11. Inventory control performs all of the following

tasks except it

a. provides production planning and control with the

inventory status report of finished goods

b. updates the raw material inventory records

c. prepares a materials requisition for each

production batch

d. records the completed production as an increase

to finished goods inventory

ANS: C

12. The storekeeper releases raw materials based on

the

a. production schedule

b. materials requisition
c. work order

d. bill of materials

ANS: B

13. Which of the following is not an assumption of

the Economic Order Quantity model?

a. demand for the product is known with certainty

b. total cost per year of placing orders is fixed

c. lead time is known and is constant

d. there are no quantity discounts

ANS: B

14. Firms hold safety stock to compensate for

a. mathematical weaknesses of the Economic Order

Quantity model

b. variations in lead time or daily demand

c. fluctuations in carrying costs

d. uncertainty in the estimation of ordering costs

ANS: B

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

ANS: A

16. If the daily demand is 40 units and the lead time

is 12 days, the reorder point is

a. 52 units
b. 48 units

c. 480 units

d. none of the above

ANS: C

17. Which statement is not correct?

a. general ledger creates a new cost record upon

receipt of a work order from production planning

and control

b. cost accounting updates the cost record with data

gathered from the materials requisition

c. general ledger posts summary information about

the manufacturing process based on a journal

voucher prepared by cost accounting

d. cost accounting computes variances and applies

overhead to individual cost records

ANS: A

18. Which of the following is not a category of

critical success factors in most manufacturing

companies?

a. product quality

b. customer service

c. revenue generation

d. resource management

ANS: C

19. Computer integrated manufacturing groups all of

the following technologies except

a. robotics

b. materials requirements planning

c. automated storage and retrieval systems

ANS: B

20. The SAP R/3 system provides pre-defined

modules to support business processes in the all of

the following categories except

a. human resources

b. business process support

c. strategic

d. financial

ANS: C

21. Which situation violates the segregation of

functions control procedure?

a. production planning and control is located apart

from the work centers

b. inventory control maintains custody of inventory

items

c. cost accounting has custody of and makes entries

on cost records

d. work centers record direct labor on job tickets

ANS: B

22. All of the following are internal control

procedures that should be in place in the conversion

cycle except

a. calculation and analysis of direct material and

direct labor variances

b. retention of excess materials by work centers

c. physical count of inventory items on hand

d. limited access to raw material and finished goods

inventories
ANS: B

23. Process simplification focuses on

a. using Computer Numerical Controlled machines

which stand alone within a traditional setting

b. completely automating the manufacturing

environment

c. reducing the complexity of the physical

manufacturing layout of the shop floor

d. organizing the process into functional

departments

ANS: C

24. A manufacturing process that is organized into

group technology cells utilizing no human labor is

called

a. islands of technology

b. process simplification

c. Computer Integrated Manufacturing

d. traditional manufacturing

ANS: C

25. An example of automation of manufacturing

design is

a. Computer Aided Engineering

b. Automated Storage and Retrieval Systems

c. Computer Numerical Control

d. robotics

ANS: A

26. An example of automation of manufacturing

planning is

a. Computer Aided Engineering

c. Materials Requirements Planning

d. Computer Numerical Control

ANS: C

27. Firms implement a Just-In-Time inventory

approach to

a. reduce investment in inventories

b. determine the optimum inventory level using the

EOQ model

c. camouflage production problems

d. ensure overproduction of inventory

ANS: A

28. Characteristics of Just-In-Time manufacturing

include all of the following except

a. push manufacturing

b. zero defects

c. reduced setup time and small lot sizes

d. reliable vendors

ANS: A

29. The cost of poor quality includes all of the

following except

a. cost of rework

b. warranty claims

c. scheduling delays

d. proceeds from the sale of scrap

ANS: D

30. A flexible manufacturing system

a. creates bottlenecks in the process

b. leads to an “us” versus “them” attitude among

c. shortens the physical distance between activities

d. is organized along functional lines

ANS: C

31. Deficiencies of the traditional cost accounting

information system include all of the following

except

a. an emphasis on financial performance

b. inaccurate cost allocations

c. an emphasis on standard costs

d. immediate feedback about deviations from the

norm

ANS: D

32. Which statement is not correct?

a. an activity driver is a means to measure the

activity used by the cost object

b. cost object describes the work performed in a firm

c. activities cause costs

d. cost objects create a demand for activities

ANS: B

33. Firms are adopting Activity Based Costing (ABC)

because

a. it facilitates the analysis of variances

b. it more accurately allocates costs to products

c. it recognizes the importance of direct labor as a

component of total manufacturing cost

d. the financial nature of the reports permits

comparisons to be made among different types of

products
ANS: B

34. In traditional firms, information reporting

a. provides financially oriented information relating

to operations

b. presents detailed information about activities

c. shows the allocation of costs first to activities and

then to cost objects

d. identifies nonessential activities

ANS: A

35. Types of information provided by Activity Based

Costing include

a. a description of the single activity driver used for

overhead application

b. the dollar value of the direct material usage

variance

c. identification of cost drivers

d. details of the components of the single overhead

cost pool

ANS: C

36. Which statement is not correct?

a. the benchmark approach compares key activities

with similar activities in other firms

b. critical success factors include product and

process quality

c. the ABC model includes two perspectives: an

allocation of cost perspective and a process

perspective

d. 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

a. production schedule

b. route sheet

c. materials requisition

d. purchase order

ANS: D

38. Transaction authorization occurs in a traditional

manufacturing environment in all of the following

ways except

a. production planning and control initiates

production with a work order

b. movement of the work through the production

process follows the move ticket

c. the sales department modifies work orders to

match changes in demand

d. the materials requisition authorizes the

storekeeper to release materials to the work centers

ANS: C

39. Manufacturing flexibility incorporates four

characteristics. These include all of the following

except

a. high product quality

b. high inventory levels

c. automation of manufacturing processes

d. physical reorganization of production facilities

ANS: B

40. The stages of the automation continuum are (in

a. traditional, computer-integrated manufacturing,

islands of technology, process simplification

b. process simplification, traditional, islands of

technology, computer-integrated manufacturing

c. traditional, islands of technology, process

simplification, computer-integrated manufacturing

d. traditional, process simplification, computer-

integrated manufacturing, islands of technology

ANS: C