Page 306 - COSO Guidance Book

Case

This case involves a furniture manufacturing company that produces goods made to order. The
company uses a job cost system. The individuals who will document this system (documenters) request
senior management to prepare a memo that stresses the importance to employees of cooperating in this
documentation endeavor. The memo is prepared and sent to all appropriate personnel.

The documenters meet and schedule appointments with appropriate operations personnel in order to
obtain an understanding of how the revenue system works. Following is a narrative of this process.

Narrative

The documenters have prepared the following narrative of the production system.

Summary
All sales are to companies, such as retail establishments, hotels, and hospitals. All sales orders originate
from customers. The company does not have a sales department — the company was established over
100 years ago and it has an outstanding reputation in the industry.

Order processing
Customers can place orders by phone, fax, or at the company’s website. When orders are taken by
phone, order-takers enter the information into the IT system, which assigns the order a sequential
number. If the order is by fax, a scan of the preformatted order form is routed to data-entry personnel
who enter the order information into the IT system. The system assigns these orders a sequential
number. Orders from the company’s website are automatically entered into the IT system by customers;
internet orders also are assigned a sequential number. The customer must use a company-provided
password to access the company’s intranet. Within the organization, all data entry personnel are also
required to use passwords, which restrict access to certain data and processes.
The next step in the process is for the order to enter into the costing system, which is an automated
process. For example, when a hospital orders five beds of a particular type, the costing system
determines current standard materials, labor, and overhead costs. The system has access to suppliers’
systems to obtain current prices of raw materials. Labor prices are contained in the payroll system and
fixed for the year. Total overhead allocated is based on last year’s amount plus 10%.

After determining the standard cost of a particular order, the company sets the price at twice the
standard cost. The system will add the total dollar amount of this order to the outstanding balance in the
customer’s accounts receivable. If this total exceeds the customer’s credit limit, then the credit
department is contacted to assess whether additional credit will be extended.

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