Chapter 7—The Conversion Cycle

TRUE/FALSE

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

ANS: T PTS: 1

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

ANS: T PTS: 1

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

ANS: F PTS: 1

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

ANS: F PTS: 1

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 PTS: 1

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

ANS: F PTS: 1

7. Cement and petrochemicals are produced by the batch manufacturing method.

ANS: F PTS: 1

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

ANS: T PTS: 1

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

ANS: T PTS: 1

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

ANS: F PTS: 1

11. Typically the only allocated cost in the value stream is a charge per square foot for the value stream
production facility.

ANS: T PTS: 1
12. Computer Integrated Manufacturing focuses on reducing the complexity of the physical manufacturing
layout of the shop floor.

ANS: F PTS: 1

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

ANS: F PTS: 1

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

ANS: F PTS: 1

15. ABC assigns cost to cost objects based on their use of activities.

ANS: T PTS: 1

16. The complexities of ABC have caused many firms to abandon this method in favor of a simpler
accounting model called value stream accounting.

ANS: T PTS: 1

17. A company’s value stream includes all steps in a process, both essential and non-essential, for which
the customer is willing to pay.

ANS: F PTS: 1

18. Lean manufacturing evolved from the Toyota Production System (TPS), which is based on the just-in-
time (JIT) production model.

ANS: T PTS: 1

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

ANS: F PTS: 1

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

ANS: T PTS: 1

MULTIPLE CHOICE

1. Which statement is true?

a. World-class companies must maintain strategic agility and be able to turn on a dime.
b. World-class companies motivate and treat employees like appreciating assets.
c. Manufacturing firms that achieve world-class status do so by following a philosophy of
lean manufacturing
d. All the above are true
ANS: D PTS: 1
2. Which function is not a part of the batch production process?
a. Plan and control production
b. Prepare purchase orders
c. Maintain inventory control
d. Perform cost accounting
ANS: B PTS: 1

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 PTS: 1

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 PTS: 1

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 PTS: 1

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 PTS: 1

7. When one of the following statements is true?

a. ERP evolved directly from MRP.
b. ERP evolved into MRP and MRP evolved into MRP II

c. MRP II evolved from MRP and MRP II evolved into ERP

d. None of the above is true.
ANS: D PTS: 1

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 PTS: 1

9. A move ticket
a. is the formal plan and authority to begin production
b. specifies the materials and production required for each batch
c. records the work done in each work center
d. authorizes the storekeeper to release materials to work centers
ANS: C PTS: 1

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 PTS: 1

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 PTS: 1

12. The storekeeper releases raw materials based on the

a. production schedule
b. materials requisition
c. work order
d. bill of materials
ANS: B PTS: 1

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 PTS: 1

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 PTS: 1

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 PTS: 1

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 PTS: 1

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 PTS: 1

18. Which of the following is not a problem associated with standard cost accounting?
a. Standard costing motivates management to produce large batches of products and build
inventory.
b. Applying standard costing leads to product cost distortions in a lean environment.
c. Standard cost data are associated with excessive time lags that reduce its usefulness.
d. The financial orientation of standard costing may promote bad decisions.
e. All of the above are problems with standard costing.
ANS: E PTS: 1

19. Computer integrated manufacturing groups all of the following technologies except
a. robotics
b. materials requirements planning
c. automated storage and retrieval systems
d. computer aided design
ANS: B PTS: 1

20. Which of the following would not be included as a value stream cost?
a. Labor costs of employees who simply transport the product from cell to cell.
b. Labor costs of employees who design the product.
c. A charge per square foot for the value stream production facility including cost of rent and
building maintenance.
d. All of the above are value stream costs
ANS: D PTS: 1

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 PTS: 1
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 PTS: 1

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 PTS: 1

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 PTS: 1

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 PTS: 1

26. An example of automation of manufacturing planning is

a. Computer Aided Engineering
b. Automated Storage and Retrieval Systems
c. Materials Requirements Planning
d. Computer Numerical Control
ANS: C PTS: 1

27. Which of the following is not true?

a. The complexities of ABC have caused many firms to pursue value stream accounting.
b. Value stream accounting captures costs related to value added activities within a specified
department or activity.
c. An essential aspect in implementing value stream accounting is defining the product
family.
d. Value stream accounting makes no distinction between direct costs and indirect costs.
ANS: B PTS: 1

28. Characteristics of lean 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 PTS: 1

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 PTS: 1

30. A flexible manufacturing system

a. creates bottlenecks in the process
b. leads to an “us” versus “them” attitude among workers
c. shortens the physical distance between activities
d. is organized along functional lines
ANS: C PTS: 1

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 PTS: 1

32. Which statement is not correct?

a. cost objects are the reasons for performing activities
b. cost object describes the work performed in a firm
c. activities cause costs
d. cost objects create a demand for activities
ANS: B PTS: 1

33. Firms are abandoning Activity Based Costing (ABC) because

a. it does not facilitates the analysis of variances
b. it is complex and time consuming
c. it does not recognize the importance of direct labor as a component of total manufacturing
cost
d. the financial nature of the reports does not permit comparisons to be made among different
types of products
ANS: B PTS: 1

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 PTS: 1
35. Which of the following statements about the EOQ inventory model assumptions is incorrect?
a. Demand for the product is constant and known with certainty.
b. The lead time is a variable.
c. All inventories in the order arrive at the same time.
d. Total ordering cost is a variable
ANS: B PTS: 1

36. Which statement is not correct?

a. Inventories provide a competitive advantage.
b. Inventories can invite overproduction.
c. Inventories are expensive to maintain.
d. Inventories may conceal problems.
ANS: A PTS: 1

37. All of the following are documents in batch process production systems except
a. production schedule
b. route sheet
c. materials requisition
d. bill of manufacturing
ANS: D PTS: 1

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 PTS: 1

39. Which of the following is not a principle of lean manufacturing?

a. Products are pushed from the production end to the customer
b. All activities that do not add value and maximize the use of scarce resources must be
eliminated
c. Achieve high inventory turnover rate.
d. A lean manufacturing firm must have established and cooperative relationships with
vendors
e. All of the above are lean manufacturing principles.
ANS: A PTS: 1

40. All of the following are problems with traditional accounting information except:
a. Managers in a lean setting require immediate information.
b. The measurement principle tends to ignore standards other than money.
c. Standard costing motivates nonlean behavior in operations.
d. The overhead component in a manufacturing company is usually very large.
e. All of the above are problems associated with traditional accounting information.
ANS: E PTS: 1

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

ANS:
continuous process manufacturing

PTS: 1

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

ANS:
The BOM specifies the types and quantities of raw materials and subassemblies used in producing a
single unit of finished product.

PTS: 1

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

ANS:
A materials requisition authorizes the storekeeper to release materials and subassemblies to the
production process. A purchase requisition authorizes the purchasing department to place an order with
an external vendor to acquire goods or services.

PTS: 1

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

ANS:
work orders prepared by production planning and control; move tickets signed by the foreman;
materials requisitions and excess materials requisitions

PTS: 1

5. Explain the conversion cycle.

ANS:
A company’s conversion cycle transforms (converts) input resources, such as raw materials, labor, and
overhead, into finished products or services for sale.

PTS: 1

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

ANS:
A flexible production system shortens the physical distance between activities, reducing setup time,
processing time, handling costs, and inventories.

PTS: 1

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

ANS:
 Cost allocations may be inaccurate; there is a time lag in reporting; information is reported in financial
terms; there is an emphasis on standard cost.

PTS: 1

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

ANS:
an activity

PTS: 1

9. Discuss inventory control objectives.

ANS:
Inventory control minimizes total inventory cost while ensuring that adequate inventories exist to meet
current demand. Various inventory models used to help answer two fundamental questions:
1. When should inventory be purchased?
2. How much inventory should be purchased?

PTS: 1

10. Describe the primary goal of lean manufacturing?

ANS:
The goal of lean manufacturing is improved efficiency and effectiveness in every area, including
product design, supplier interaction, factory operations, employee management, and customer
relations.

PTS: 1

11. What is meant by the term "islands of technology"?

ANS:
Islands of technology describes an environment where modern automation exists in the form of islands
that stand alone within the traditional setting.

PTS: 1

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

ANS:
Cost accounting reconciles materials and labor usage, from the materials requisitions and job tickets,
with prescribed standards and identifies significant departures. Such variance analysis is important for
control of the manufacturing process.

PTS: 1

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

ANS:
 In the traditional manufacturing environment, direct labor is a much larger component of total
manufacturing costs than in the CIM environment. Overhead, on the other hand, is a far more
significant element of cost in advanced technology manufacturing.

PTS: 1

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

ANS:
Inventory control must be separated from raw materials and finished goods custody. Cost accounting
must be separate from the work centers. General ledger must be separate from other accounting
functions.

PTS: 1

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

ANS:
activities

PTS: 1

16. Differentiate between essential and non-essential activities.

ANS:
Essential activities add value to the organization either through adding value to the customer or to the
organization. Non-essential activities do not add value.

PTS: 1

17. What is a company’s value stream?

ANS:
A company’s value stream includes all the steps in the process that are essential to producing a
product. These are the steps for which the customer is willing to pay.

PTS: 1

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

ANS:
The receipt by cost accounting of the last move ticket for a batch from the work center signals the
completion of the production process.

PTS: 1

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

ANS:
The work order from the production planning and control department triggers the cost accounting
process.
 PTS: 1

20. Name five documents associated with batch production systems.

ANS:
Sales forecast, production schedule, bill of materials, route sheet, work order, move ticket, and
materials requisition.

PTS: 1

ESSAY

1. Itemize the disadvantages of ABC that have cause some firms to abandon this technique.

ANS:
ABC has been criticized for being too time consuming and complicated for practical
applications over a sustained period.
Critics charge that rather than promoting continuous improvement, ABC creates complex
bureaucracies within organizations that are in conflict with the lean manufacturing philosophies of
process simplification and waste elimination.
The task of identifying activity costs and cost drivers can be a significant and ongoing undertaking.
As products and processes change so do the associated activity costs and drivers.
 Unless significant resources are committed to maintaining the accuracy of activity costs and the
appropriateness of drivers, cost assignments become inaccurate.

PTS: 1

2. Contrast the treatment of inventories in the traditional manufacturing environment and the lean
manufacturing environment.

ANS:
In the traditional manufacturing environment, inventories are used to reduce or eliminate back orders.
The goal in the lean environment is to minimize the cost of holding inventory and the costs of ordering
or manufacturing inventory.

In a lean manufacturing environment inventories are kept to the absolute minimum. Inventory is
“pulled” through the manufacturing process. The concept assumes: zero defects, zero setup time, small
lot sizes, zero inventories, zero lead time, and reliable vendors.

PTS: 1

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

ANS:
Production planning and control should be separate from the work centers.

Inventory control, which maintains accounting records for raw materials (RM) and (FG) inventories
should be kept separate from the materials storeroom and from the FG warehouse functions where
these assets reside.
 The cost accounting function accounts for work in process and should be separate from the work
centers in the production process.

The general ledger (GL) function should be separate from departments keeping subsidiary account

PTS: 1

4. Outline the characteristic of a World-Class company.

ANS:
World-class companies must maintain strategic agility and be able to turn on a dime. Top
management must be intimately aware of customer needs and not become rigid and resistant paradigm
change.
World-class companies motivate and treat employees like appreciating assets. To activate the talents
of everyone, decisions are pushed to the lowest level in the organization. The result is a flat and
responsive organizational structure.
A world-class company profitably meets the needs of its customers. Its goal is not simply to satisfy
customers, but to positively delight them. This is not something that can be done once and then
forgotten. With competitors aggressively seeking new ways to increase market share, a world class
firm must continue to delight its customers.
The philosophy of customer satisfaction permeates the world class firm. All of its activities, from the
acquisition of raw materials to selling the finished product, form a “chain of customers.” Each activity
is dedicated to serving its customer, which is the next activity in the process. The final “paying”
customer is the last in the chain.
Finally, manufacturing firms that achieve world-class status, do so by following a philosophy of
lean manufacturing. This involves doing more with less, eliminating waste, and reducing production
cycle time.

PTS: 1

5. How does automation help achieve manufacturing flexibility?

ANS:
By replacing labor with automation, a firm can reduce waste, improve efficiency, increase quality, and
improve flexibility. Examples of automation include: Automated Storage and Retrieval Systems,
Robotics, Computer Aided Design (CAD), Computer-aided manufacturing (CAM).

PTS: 1

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

ANS:
MRP is an older system that focused only on the materials requirements of the production process. It
used work orders as a basis for a bill of materials and to determine inventory requirements prior to
production. MRP II expands on this idea by identifying production need for all inputs–materials (as in
MRP), labor, and equipment. In fact, MRP II provides planning, feedback, and control for coordinating
all of the activities of a firm.

PTS: 1

7. Discuss the importance to the cost-accounting department of the move ticket.

 ANS:
The various work centers send cost accounting completed move tickets. Along with standards provided
by the standard cost file, move tickets enable cost accounting to update the affected WIP accounts with
the standard charges for manufacturing overhead (MOH). The receipt of the last move ticket for a
particular batch signals the completion of the production process and the transfer of products from
WIP to the finished goods inventory. At that point cost accounting closes the work-in-process account
and increases finished goods.

PTS: 1

8. Discuss the purpose and key features of a value stream map (VSM)?

ANS:
The purpose of a Value Stream Map (VSM) is to graphically represent a business processes to identify
aspects of it that are wasteful and should be removed.

A VSM identifies all of the actions required to complete processing on a product, along with key
information about each action item. Specific information may include total hours worked, overtime
hours, cycle time to complete a task, and error rates.

The VSM shows the total time required for each processing step, the time required between steps, and
identifies the types of time spent between steps such as the outbound batching time, transit time, and
inbound queue time.

PTS: 1

9. Discuss the principles underlying the lean manufacturing approach.

ANS:
Pull Processing. Products are pulled from the consumer end (demand), not pushed from the production end
(supply).

Perfect Quality. Success of the pull processing model requires zero defects in raw material, work in process,
and finished goods inventory.
Waste Minimization. All activities that do not add value and maximize the use of scarce resources must be
eliminated. Waste involves financial, human, inventory, and fixed assets.
Inventory Reduction. The hallmark of lean manufacturing firms is their success in inventory reduction. Such
firms often experience annual inventory turnovers of 100 times per year.
Production Flexibility. Long machine setup procedures cause delays in production and encourage
overproduction. Lean companies strive to reduce setup time to a minimum, which allows them to produce a
greater diversity of products quickly, without sacrificing efficiency at lower volumes of production.
Established Supplier Relations. A lean manufacturing firm must have established and cooperative
relationships with vendors. Late deliveries, defective raw materials, or incorrect orders will shut down
production immediately since this production model allows no inventory reserves to draw upon.

PTS: 1

10. Discuss three common problems associated with inventories.

ANS:
 1. Inventories cost money. They are an investment in materials, labor, and overhead that cannot be
realized until sold. Inventories also contain hidden costs. They must be transported throughout the
factory. They must be handled, stored, and counted. In addition, inventories lose value through
obsolescence.
2. Inventories camouflage production problems. Bottlenecks and capacity imbalances in the
manufacturing process cause WIP inventory to build up at the choke points. Inventories also build up
when customer orders and production are out of sync.
3. Willingness to maintain inventories can precipitate overproduction. Because of setup cost
constraints, firms tend to overproduce inventories in large batches to absorb the allocated costs and
create the image of improved efficiency. The true cost of this dysfunctional activity is hidden in the
excess inventories.

PTS: 1

11. Automation is at the heart of the lean manufacturing philosophy. Discuss its stages and its
distinguishing features.

ANS:
Automation of the manufacturing process can be viewed as a gradual progression. The stages are:
Traditional manufacturing which consists of many different types of machines that require a lot of
setup time, each controlled by a single operator. The WIP follows a circuitous route through the
different operations.

Islands of technology in which stand alone islands employ computer numerical controlled (CNC)
machines that can perform multiple operations with less human involvement–less set up time.

Computer integrated manufacturing (CIM)–a completely automated environment which employs

automated storage and retrieval systems (AS/RS) and robotics.

PTS: 1

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

ANS:
The use of standard costs provides a type of access control. By specifying the quantities of material
authorized for each product, the firm limits usage. To obtain excess quantities requires special
authorization and excess materials requisitions.

PTS: 1

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

ANS:
 Manufacturing resources planning (MRP II) is an extension of a simpler concept still in use called
materials requirements planning (MRP). MRP is an automated version of a traditional production
planning and control process. On the other hand, MRP II is a reengineering technique that integrates
several business processes. MRP II is not confined to the management of inventory. It is both a system
and a philosophy for coordinating the activities of the entire firm. As such, MRP II has evolved into
the large suites of software called enterprise resource planning (ERP) systems. These huge
commercial packages support the information needs of the entire organization, not just the
manufacturing functions. Similarities in functionality between ERP and MRP II systems are quite
apparent. Some argue that very little real functional difference exists between the two concepts.
Indeed, the similarities are most noticeable when comparing top-end MRP II systems with low-end
ERP packages.

PTS: 1

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

ANS:
Product design has been revolutionized through CAD technology. Advanced CAD systems can design
both product and process simultaneously. Thus, aided by CAD, management can evaluate the technical
feasibility of the product and determine its “manufacturability.” CAD technology greatly shortens the
time frame between initial and final design. This allows firms to adjust their production quickly to
changes in market demand. It also allows them to respond to customer requests for unique products.
The CAD system’s EDI interface permits the world-class manufacturer to share its product design
specifications with its vendors and customers. This communications link also allows the world-class
manufacturer to receive product design specifications electronically from its customers and suppliers
for its review.

PTS: 1

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

ANS:
Computer-aided manufacturing (CAM) focuses on the shop floor and the use of computers to control
the physical manufacturing process. The objective behind CAM is to replace labor through
automation. CAM systems monitor and control the production process and routing through the use of
process control, numerical control, and robotics equipment. A world-class manufacturer will derive
several benefits from deploying a CAM system: improved process productivity, improved cost and
time estimates, improved process monitoring, improved process quality, decreased setup times, and
reduced labor costs.

PTS: 1

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

ANS:
Traditional accounting systems do not accurately trace costs to products and processes. One
consequence of new technologies is a changed relationship between direct labor and overhead costs. In
the traditional manufacturing environment, direct labor is a much larger component of total
manufacturing costs than in the CIM environment. Overhead, on the other hand, is a far more
significant element of cost in advanced technology manufacturing. In this setting, traditional cost
accounting procedures are inadequate. For traditional allocations to be correct, a direct relationship
between labor and technology needs to exist. In CIM, this relationship is diametric rather than
complementary. When the cost pool is large and the allocation method ambiguous, any miscalculation
in assigning labor is magnified many times in the calculation of overhead.
 PTS: 1

17. What is meant by the term “product family” and what is its relationship to value stream
accounting.

ANS:
Most organizations produce more than one product, which fall into natural lines or families. Product
families share common processes from the point of placing the order to shipping the finished goods to
the customer.

Value stream accounting cuts across functional and departmental lines to include costs related to the
product family such as marketing, selling expenses, product design, engineering, materials purchasing,
distribution, and more, but makes no distinction between direct costs and indirect costs.

PTS: 1