Question

1. Read the following description of the Preview Company.
   1. Use the following table to assess the strengths and weaknesses of Preview's entity-level controls. I have only included space for three strengths and three weaknesses to limit the length of the assignment. For each weakness you identify, suggest an improvement that would reduce that weakness.

Preview Company Case Description

Preview Company, a diversified manufacturer, has five divisions that operate throughout the United States and Mexico. Preview has historically allowed its divisions to operate autonomously. Corporate intervention occurred only when planned results were not obtained. Corporate management has high integrity, but the board of directors and audit committee are not very active. Preview has a policy of hiring competent people. The company has a code of conduct, but there is little monitoring of compliance by employees. Management is fairly conservative in terms of accounting principles and practices, but employee compensation packages depend highly on performance. Preview Company does not have an internal audit department, and it relies on its external auditor to review the controls in each division.

Chip Harris is the general manager of the Fabricator Division. The Fabricator Division produces a variety of standardized parts for small appliances. Harris has been the general manager for the last seven years, and each year he has been able to improve the profitability of the division. He is compensated based largely on the division's profitability. Much of the improvement in profitability has come through aggressive cost cutting, including a substantial reduction in control activities over inventory.

During the last year, a new competitor has entered Fabricator's markets and has offered substantial price reductions in order to grab market share. Harris has responded to the competitor's actions by matching the price cuts in the hope of maintaining market share. Harris is very concerned because he cannot see any other areas where costs can be reduced so that the division's growth and profitability can be maintained. If profitability is not maintained, his salary and bonus will be reduced.

Harris has decided that one way to make the division more profitable is to manipulate inventory because it represents a large amount of the division's balance sheet. He also knows that controls over inventory are weak. He views this inventory manipulation as a short-run solution to the profit decline due to the competitor's price-cutting. Harris is certain that once the competitor stops cutting prices or goes bankrupt, the misstatements in inventory can be corrected with little impact on the bottom line.

Entity-Level Controls
Strength	Reason it is a strength

Entity-Level Controls
Weakness	Reason it is a weakness and suggested improvement

2. What factors in Preview Company's control environment led to and facilitated Harris' manipulation of inventory? Your answer here may include items you listed above, but you should relate the specifically to the inventory manipulation in the question.

Answer 1

1. Use the following table to assess the strengths and weaknesses of Preview's entity-level controls. I have only included space for three strengths and three weaknesses to limit the length of the assignment. For each weakness, you identify, suggest an improvement that would reduce that weakness.

Preview Company, a diversified manufacturer, has five divisions that operate throughout the United States and Mexico. The preview has historically allowed its divisions to operate autonomously. Chip Harris is the general manager of the Fabricator Division. The Fabricator Division produces a variety of standardized parts for small appliances. Harris has been the general manager for the last seven years, and each year he has been able to improve the profitability of the division. He is compensated based largely on the division's profitability. Much of the improvement in profitability has come through aggressive cost-cutting, including a substantial reduction in control activities over inventory. During the last year, a new competitor has entered Fabricator's markets and has offered substantial price reductions in order to grab market share. Harris has responded to the competitor's actions by matching the price cuts in the hope of maintaining market share. Harris is very concerned because he cannot see any other areas where costs can be reduced so that the division's growth and profitability can be maintained. If profitability is not maintained, his salary and bonus will be reduced.

Entity level Control:

Strength	Reason for strength
Manufacturing Process	Process optimization Workforce Optimisation Energy Consumption Maintain quality Lower cost of compliance Inventory Carrying Cost Reduce in Material,Labor and Overhead cost
Pricing policy of the product	Skimming price Penetration Price Pricing in Maturity
Debottlenecking of the Plant	Improve the quality and volume Reduce the threat and weakness of the area Increase the efficiency of the machine
Weakness	The reason it is a weakness and suggested improvement
Price Cutting Measure	It will affect the profitability of the Company and its share, To face the competitor Prevention is required by way of reducing the price and minimize the cost adopting identifying the key areas, analyze, and remedial measures should take to improve productivity.
Cost Cutting Measure	It is important to reduce the cost of Material, Labor and Overhead cost.
Manipulating Inventory	Inventory plays an important role in determining the cost. Proper System and procedure to maintain and implement. Proper audit system to implement to audit the inventory monthly and physically olso.

2. What factors in Preview Company's control environment led to and facilitated Harris' manipulation of inventory? Your answer here may include items you listed above, but you should relate the specifically to the inventory manipulation in the question.

Inventory control is the processes employed to maximize a company's use of inventory. The goal of inventory control is to generate the maximum profit from the least amount of inventory investment without intruding upon customer satisfaction levels. Given the impact on customers and profits, inventory control is one of the chief concerns of businesses that have large inventory investments, such as retailers and distributors. Some of the more common areas in which to exercise inventory control are:

• Raw materials availability. There must be enough raw materials inventory on hand to ensure that new jobs are launched in the production process in a timely manner, but not so much that the company is investing in an inordinate amount of inventory. The key control designed to address this balance is ordering frequently in small lot sizes from suppliers. Few suppliers are willing to do this, given the cost of frequent deliveries, so a company may have to engage in sole sourcing of goods in order to entice suppliers into engaging in just-in-time deliveries.
• Finished goods availability. A company may be able to charge a higher price for its products if it can reliably ship them to customers at once. Thus, there may be a pricing premium associated with having high levels of finished goods on hand. However, the cost of investing in so much inventory may exceed the profits to be gained from doing so, so inventory control involves balancing the proportion of allowable backorders with a reduced level of on-hand finished goods. This may also lead to the use of a just-in-time manufacturing system, which only produces goods to specific customer orders (which nearly eliminates inventory levels).
• Work in process. It is possible to reduce the amount of inventory that is being worked on in the production process, which further reduces the inventory investment. This can involve a broad array of actions, such as using production cells to work on subassemblies, shifting the work area into a smaller space to reduce the amount of inventory travel time, reducing machine setup times to switch to new jobs, and minimizing job sizes.
• Reorder point. A key part of inventory control is deciding upon the best inventory level at which to reorder additional inventory. If the reorder level is set very low, this keeps the investment in inventory low, but also increases the risk of a stockout, which may interfere with the production process or sales to customers. The reverse problems arise if the reorder point is set too high. There can be a considerable amount of ongoing adjustment to reorder levels to fine tune these issues. An alternative method is to use a material requirements planning system to order only enough inventory for expected production levels.
• Bottleneck enhancement. There is nearly always a bottleneck somewhere in the production process that interferes with the ability of the entire operation to increase its output. Inventory control can involve placing an inventory buffer immediately in front of the bottleneck operation, so that the bottleneck can keep running even if there are production failures upstream from it that would otherwise interfere with any inputs that it requires.
• Outsourcing. Inventory control can also involve decisions to outsource some activities to suppliers, thereby shifting the inventory control burden to the suppliers (though usually in exchange for a reduced level of profitability).

The issues noted here highlight how difficult it can be to manage the inventory control function. Your operating boundaries are to either invest too much in inventory, or to have too little inventory on hand to satisfy the production manager or customers.