2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 2

QUESTIONS

• The two major objectives of materials con-

trol are (1) physical control or safeguarding the materials and (2) control of the invest- ment in materials.

• The controls established for safeguarding

materials include limiting access to the materials area, segregating the duties of employees involved with materials, and as- suring that materials records are being maintained accurately.Limiting access involves placing inven- tories in storage areas that can be entered only by authorized personnel and restricting the release of any materials or finished goods to individuals who have properly au- thorized documents. Control procedures that limit access to work in process areas should be established within each department or production station.The segregation of duties involves as- signing different people to different func- tions. Employees assigned to purchasing should not also be assigned to receiving, storage, or recording functions, etc.The accurate recording of purchases and issuances of materials facilitates com- paring the recorded materials on hand to the actual materials on hand. If a substantial dif- ference between the recorded and actual quantities is discovered, it can be quickly determined and investigated.

• Management should consider production

and working capital requirements along with alternative uses of available funds that might yield a greater return. Consideration should also be given to the cost of materials han- dling, storage, and insurance protection against fire, theft, and other casualty losses.In addition, the possibility of loss from dam- age, spoilage, and obsolescence should not be overlooked.

• Order point is the time to place an order for

additional material because the level of stock has reached a predetermined mini- mum established by management.

• In order to determine an order point, the in-

formation available should include the:

(1) anticipated daily usage of the material, (2) lead-time interval, and (3) required safety stock.The anticipated usage requirement should be founded upon the number of units expected to be completed daily and the quantity of material each completed unit will require.The lead time interval involves the typi- cal period of time required between placing the order and receiving the shipment.The safety stock is the minimum stock on hand needed to prevent running out of stock due to errors in calculations of usage, delivery delays, poor quality of merchandise received, and so on.

• The economic order quantity (EOQ) is the

calculated size of an order that minimizes the total cost of ordering and carrying the in- ventory over a specified period of time. It is a function of the cost of placing an order, the number of units required annually, and the carrying cost per unit of inventory

• The cost of placing an order, the number of

units required annually, and the annual car- rying cost per unit in inventory are the items needed to calculate the economic order quantity.

• The cost of an order includes the salaries

and wages of employees who purchase, re- ceive, and inspect materials; the expenses incurred for telecommunications, postage, and forms; and the accounting and record keeping associated with inventories.

• The carrying cost of materials inventory in-

cludes the cost of storage and handling; the amount of interest lost on alternative invest- ments; the losses due to obsolescence, spoil- age, and theft; the cost of insurance and prop- erty taxes; and the cost of maintaining ac- counting records and controls over the inven- tory.

• The supply chain is the system that links a

manufacturer with its suppliers. If the system is especially “lean”, in an effort to be cost ef- ficient, it is quite possible that parts may not be available when needed due to work stop- pages, strikes, or natural disasters.

11. a. Purchasing agent duties include:

(1) coordinating materials requirements with production to prevent delays in production due to inadequate materi- als supply on hand.Principles of Cost Accounting 17th Edition Vanderbeck Solutions Manual Visit TestBankDeal.com to get complete for all chapters

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©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.(2) compiling and maintaining a vendor file from which materials can be promptly obtained at the best avail-

able prices. (Note to Instructor: You

may take this opportunity to explain to the student that the “lowest” price may not always be the “best” price.) The purchasing agent should also consider the quantity to be ordered at one time to get a lower unit price, the quality of the material, the time lapse before delivery, the credit terms, and the reliability of the vendor.

(3) placing purchase orders for materi- als needed.(4) supervising the purchase order pro- cess until materials are received.

• The receiving clerk is responsible for

supervising the receipt of incoming shipments. These duties include check- ing the quantity and quality of the goods received.

• The storeroom keeper’s usual duties

include properly storing all materials re- ceived, issuing materials only when proper authorization is presented, and keeping the purchasing agent informed of the quantities on hand.

• The production supervisor is responsi-

ble for maintaining production and for preparing or approving requisitions for the quantities and kinds of materials needed for current production.

• A purchase requisition is used by the store-

room keeper to provide the purchasing agent with information concerning the mate- rials to be ordered. A purchase order is a document completed by the purchasing agent and sent to a vendor to order the ma- terials.

• An enterprise resource planning (ERP) sys-

tem is a sophisticated computer system that coordinates the sales and production sched- uling functions with the purchase and control of materials.

• Many manufacturing firms use forms some-

what similar to those shown in the text; how- ever, most firms design forms to meet their specific requirements. These specially de- signed forms usually perform the same func- tions as those depicted in the text but may vary in appearance. For example, a pur- chase order will provide for recording all essential information to obtain materials from selected vendors, regardless of the de- sign or format. Many firms now use enter- prise resource planning systems to control materials and electronic data interchange to communicate with suppliers and expedite the receipt of orders which might eliminate the use of some forms.

• The internal control procedures established

for incoming shipments should provide the

following safeguards:

• A receiving report prepared by the re-

ceiving clerk authenticates the quantity of specific items ordered and verifies that they were received in good condition.

• A copy of the receiving report should

accompany the materials received when they are moved from the receiving area to the storeroom. As materials are placed in location, the storeroom keeper should review and substantiate the quantities received per the receiving re- port.

• The cost and quantity of each item on

the approved invoice are independently recorded in the materials ledger.

• The total of the invoice is independently

recorded in the purchases journal to be subsequently posted to the appropriate general ledger accounts.

• The invoice for materials purchased

should not be approved for payment un- til it is matched to the receiving report and purchase order and the following

details are checked:

(1) The unit prices and materials de- scriptions on the invoice are com- pared with similar data on the purchase order.(2) The extensions of unit prices and totals are verified.(3) The terms of payment and any other charges are verified with the pur- chase order.(4) The method of shipment and date of delivery are verified.

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• The purpose of a debit-credit memorandum

is to inform the vendor that an adjustment has been made to the vendor’s account.The information on the memo includes the amount of the adjustment, the reason for the adjustment, and the type and quantity of materials involved.

• The bill of materials is a file contained in an

enterprise resource planning system that lists all of the materials and components that make up a finished product. When orders are received from customers, the bill of ma- terial is used to compute the quantities of materials required. This information is used to prepare lists for the storeroom clerk or trigger purchase requisitions.

• A materials ledger is a subsidiary ledger in

which individual accounts are kept for each item of material carried in stock. The materi- als account in the general ledger is the con- trol account for the materials ledger.

19. a. First-in, first-out: It is assumed that

materials issued are from the oldest ma- terials in stock. They were the first pur- chased and are costed at the prices paid for these earliest purchases. The cost of the ending inventory will reflect the prices paid for the most recent purchases.

b. Last-in, first-out: It is assumed that

materials issued are from the most re- cent stock. The last purchased will be the first used at the prices paid for these latest purchases. The ending inventory will be costed at the prices paid for the earliest purchases.

c. Weighted average: Under this method,

no attempt is made to identify the mate- rials issued as to the time of purchase.The average unit price of all materials in stock is maintained; therefore, materials issued are costed on a basis of average prices. Unit cost changes each time unit purchase prices change; therefore, end- ing inventory will be priced at the latest average cost.

• In a period of rising prices, the LIFO method

estimates the cost of goods sold using the materials purchased at the highest prices.Such costs, when matched to sales for the period are believed to more accurately re- flect the gross margin earned. The lower in- come, resulting from the use of LIFO, means that a smaller amount of taxes will be paid than if some other method were used.Since LIFO leaves the earlier costs of pur- chases in inventory, the overall value of the materials on hand at the end of a period will be more conservatively stated than if FIFO were used. This lower valuation of materials inventory, which affects both the income statement and the balance sheet, may be an advantage or a disadvantage depending on the use made of the balance sheet. The lower valuation is an advantage when prop- erty taxes are assessed on the dollar amount of inventory on hand.Many companies, when prices are ris- ing, adopt LIFO to minimize the income tax effects and believe that in such economic trends the costs charged against sales more accurately depict reality.

21.Entries Source of Data

• Debits in materials Receiving

ledger to record report materials purchased

• Credits in materials Materials

ledger to record requisition materials requisitioned form

• Debits in job cost Materials

ledger to record requisition materials placed in form process

• In a just-in-time manufacturing system, ma-

terials are not received from suppliers until they are ready to be put into process. The work is not done in one department until the subsequent department is ready to work on it. This approach differs from a traditional manufacturing system where materials are ordered and stored well in advance of pro- duction, and departments stockpile partially completed units until the next department is ready for them.

• A traditional “push” manufacturing system

produces goods for inventory in the hope that the demand for these goods will then be created. In a JIT “pull” manufacturing sys- tem, the credo is “Don’t make anything for anybody until they ask for it”.

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• Disadvantages of a “push” manufacturing

system include: having too many dollars

invested in inventory; defects not being de- tected because partially completed goods are inventoried rather than completed immediately; obsolete products due to the long lead time from start to finish.

• The throughput time is the time that it takes

a unit to make it through the production sys- tem, and it is computed by dividing the num- ber of units in work in process by the number of units completed each day to ob- tain a measure in days. Velocity also meas- ures the speed with which units are pro- duced in the system, but in percentage terms relative to past production; for exam- ple, velocity increased by 50%.

• Advantages of producing all units in a single

cell include: fewer and shorter movements

of materials; production in smaller lot sizes because other products do not have to be made in the same cell; more worker motiva- tion and satisfaction due to the teamwork approach within the cell.

• Critics of “backflush” costing argue that it is

not consistent with GAAP because it does not accurately account for inventories. Pro- ponents of “backflush” costing argue that Work in Process and Finished Goods are immaterial in a lean production environment and, therefore, their omission does not ma- terially misstate the financial statements.

• Six Sigma is a process improvement meth-

od that uses data gathering, analytical tech- niques, and customer feedback, and whose aim is to have no more than 3.4 defects per one million process occurrences. It is an im- portant goal because the manufacture and sale of defective items is costly and tends to damage a company’s reputation.

• If the value of the scrap is high, an inventory

file should be prepared showing the quantity and market value. If both quantity and mar- ket value are known, an inventory account should be debited while an account such as Scrap Revenue is credited. If the market value of the scrap is unknown, a journal en- try cannot be made until the scrap is sold, at which time Cash (or Accounts Receivable) is debited and Scrap Revenue is credited.

• Spoiled work represents products that are

not first quality by the company’s standards and have imperfections that will not be cor- rected. They are sold as irregular units, called seconds. Defective work also in- cludes goods that are not first quality by the established standard but have imperfections that will be corrected, making them first- quality products.