Mr. Sampson in the Inventory Department has access to the inventory
records as well as access to the actual inventory. With this “power” it would be easy for Mr. Simpson to commit fraud against the company.
Conversion Cycle Control Issues:
AUTHORIZATION
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No Move Tickets—There are no authorization activities for the movement of product between work centers.
No Excess Material Document—If a work center needs more material they do not need any special permission to get it.
SEGREGATION OF FUNCTIONS
No Storekeeping Department—The Inventory Control Department maintains the records for the inventory and has custody of the inventory.
Material Requisitions Issued by Work Centers—The work centers issue material requisitions whenever they need materials instead of the production planning and control department.
SUPERVISION
Supervision is necessary in the work centers to keep track of the products and the raw materials and be sure they are not being stolen or misplaced.
The foreman should make sure that the payroll time cards are accurate.
ACCOUNTING RECORDS
No Job Time Tickets—There are no job time tickets sent to cost accounting to verify the time spent on each job.
No Prenumbered Forms—The forms used for all the paperwork are not prenumbered, making it difficult to account for all the paper work.
ACCESS CONTROL
The company needs to limit the access employees have to the areas where materials and products are stored.
Allowing the work centers access to unlimited inventory by allowing them to request inventory at their discretion exhibits a problem with access control.
6. Solution to Automotive Components Corporation—An Activity Based Costing Case
Automotive Components Corporation has experienced some unexplainable downturns in the past few years. Their margins have been lagging, yet they consistently obtain the business for which they have been gearing up their manufacturing operations—namely the low volume parts which the auto makers have been demanding. The controller cannot explain this phenomenon, but has attended a seminar recently where he learns that other companies which have been in the same predicament implemented ABC with success.
Cost Drivers
Fortunately, ACC’s overhead had been broken down effectively before the controller has recently become interested in ABC. This is fortunate because now all that is left for the core team to do is determine the second stage cost drivers which trace cost from the activity cost pools to each of ACC’s products. The interviews the core team
conducted, as well as the discussion they provided, offer the reader enough
information to determine which second stage cost drivers would best trace costs to products. The specific drivers selected are not the most important point to take away from this case, but rather the fundamental theory of resource consumption. The following discussion is provided by discussing a specific solution to the problems outlined in the case. The case readers may choose a different approach, yet still provide sufficient discussion to support their conclusions.
Engineering—The engineering activity is discussed by the product engineer, Sally Summers. She believes that engineering’s activity is consumed by the number of components per part. This occurs in other companies as well; the engineering activities in a company are product-related activities. In other words, they are not dependent on the quantity of product produced. At ACC, it takes essentially the same amount of time to design a low volume part as a high volume part. Therefore, the cost driver for the engineering activity is the number of components per part. The number of components is an estimate of part complexity. Hence, an assumption is made that engineering costs increase as the complexity of the part increases.
Inspection—Jim Schmidt discusses the inspection activity cost pool. He notices that the inspection activity has not declined since ACC began focusing on low volume components. He discusses the first run inspections performed at ACC and notes that they are dependent on how many runs a product has. Inspection, in ACC’s case is a batch activity and the cost driver is the number of runs per product.
Material Movement—The core team’s first interview is John “Bull” Adams, the supervisor in charge of material movement. Bull tells the team that the material movement activity is driven by the number of feet moved per run. This means that this activity is driven by two factors, the number of runs and the number of feet moved. The driver is therefore the number of feet moved times the number of runs, a batch activity. The material movement activity is not influenced by part volume. A large batch requires the same amount of resources as a small batch. This is a simplification for the case. Actually, other factors may exist which influence material movement such as weight or handling requirements.
Setup—The next interview is with the most experienced jobsetter, Sara Nightingale.
Sara tells the team that she believes the setup activity is still driven by the setup time required per batch. Sara admits that with the introduction of the CNC machines for production, the workload has been reduced for the jobsetters, but the final assembly setups are still handled by mechanically experienced job-setters. The setup activity is a batch activity and should be driven by the setup time required per batch. Since Sara points out the fact that jobsetters are becoming more technical and the
programming of CNC machines requires a different type of work, a cost driver which incorporates new product introductions or product changes may be appropriate.
Shipping—The final interview is conducted with Phil Johnson, the shipping
supervisor. He believes that the activity of the shipping department is dependent on
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the number of shipments. This is a product activity. The amount of resources expended on shipping is dependent on the number of shipments per product. The shipping cost of a product is a function of the number of shipments required by the customer.
Machines—The activity cost pool named machines should be driven by the machine hours consumed per part. This is a unit cost because it occurs to every unit
produced.