Page 307 - COSO Guidance Book

The company will then mail, fax, or email to the customer an order confirmation with terms of the
agreement (that is, items ordered, sales price, delivery date, and so on). The customer must confirm all
terms before the order is sent to the production department.

Production
After receiving a confirmation of the terms of the agreement, the order is sent to production planning
where the order is scheduled for production in accordance with the sales terms. A materials requisition
report is prepared, which indicates the raw materials needed for production. Production personnel
present this requisition report to the stores department, which releases the goods. Production personnel
must sign a receipt for the raw materials received.

The raw materials are entered into production and flow through various manufacturing stages.
Employees are required to enter the time worked on each job into a computer terminal at the end of each
day. This enables production and other departments to track the progress of the work-in-process.
Overhead is allocated throughout production based on direct labor hours. Standards are established at
the start of each job and management is provided with a daily variance analysis. The hours charged to all
jobs are compared with payroll by senior management as a test of reasonableness that personnel are
actually working and charging time to jobs.

On completion of production, the goods are transferred to an inspection department, which enters the job
order number into the IT system along with and notes the items that passed inspection. These goods are
then transferred to shipping. The inspection department performs data entry and records the movement
of the goods from the inspection department to the shipping department. Any items that did not pass
inspection are sent back to production for resolution. A production order is required to rework items that
did not pass inspection; sometimes an entirely new item must be produced to replace the failed item. A
report of items that did not pass inspection, together with the reason for failure, is prepared daily and
given to senior management.

Shipping

The shipping department ships out items with the phrase free on board destination (as in, title passes to
the buyer on receipt). A packing list is included with the shipped goods. The IT system automatically
produces this list after the inspection department enters data indicating that the goods had passed
inspection. On a daily basis the shipping department enters shipped items into the database. This, in turn,
causes an invoice to be prepared (either electronic or paper depending on the customer’s preference).
1
For purposes of illustration, assume it is a paper invoice. Accounts receivable, sales, and cost of goods
sold are increased and finished-goods inventory is decreased when the goods are shipped (for purposes
of illustration, all files are on one database). Invoices are sent to the customer the same day that the
goods are shipped.

1
Some companies send a shipping notice when goods are shipped. However, in this example, the invoice serves as
the shipping notice; and is sent the day the goods are shipped.

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