The Production

Cycle
Chapter 16
Learning Objectives
• Describe the major business activities and key decisions that
must be made in the production cycle, the threats to
accomplishing production cycle objectives, and the controls
that can mitigate those threats.

• Explain the key decisions and information needs in product

design, the threats to those activities, and the controls that
can mitigate those threats.

• Explain the key decisions and information needs in planning

and scheduling production, the threats to those activities,
and the controls that can mitigate those threats.
Learning Objectives
• Explain the key decisions and information needs in
production operations, the threats to those activities, and
the controls that can mitigate those threats.

• Explain the key decisions and information needs for accurate

cost accounting, threats to those activities, and the controls
that can mitigate those threats.
Production Cycle Process
• Product Design
▫ Source documents: bill of materials and operations
list
• Planning and Scheduling
▫ Source documents: Master production schedule,
production order, and materials requisition
• Production Operations
• Cost Accounting
Production Cycle Process
1. Product
Process
Design
Creates two outputs :
 Bill of materials : component used in a finished product.

 Operations list : specifies the sequence of steps

to follow in making the product, which equipment to use, and how
long each step should take
TOOLS :
 Product life-cycle management (PLM) software :
 Computer-aided design (CAD) software (design new products)
 Digital manufacturing software (simulates how those products will
be manufactured)
 Product data management software (stores all the data
associated with products)
1. Product
Design
1. Product Design

Threats Controls
4. Poor product design 4.1 Analysis of costs arising from
resulting in excess costs product design choices
(Th.4) (accountants should participate in the
product design activity because 65% to
80% of product costs are determined at
this stage)

4.2 Analysis of warranty and

repair costs
2. Planning and Sceduling
Two common methods of production planning
Manufacturing resource planning (MRP-II) or
Push Manufacturing is an extension of materials resource
planning
( Seeks to balance existing production capacity and raw
materials needs to meet forecasted sales demands – Plans for up
to 12 months )
Lean manufacturing or Pull Manufacturing
extends the principles of just-in-time inventory systems
( Goal of lean manufacturing is to minimize or eliminate
inventories of raw materials, work in process, and finished
goods – Shoter planning horizons)
2. Planning and Scheduling

Key documents and forms

2.1 Master production schedule (MPS) : how
much of each product is to be produced during the planning
period and when that production should occur.

Information about customer orders, sales forecasts,

and inventory levels of finished goods is used to
determine production levels.
2. Planning and Scheduling
2. Planning and Scheduling
Key documents and forms
Planning and scheduling activity : produces three
other documents (production orders, materials requisitions,
and move tickets).
Step 1 – One week – One product:
2. Planning and Scheduling
Key documents and forms
Step 2 – One week – Many products :
2. Planning and Scheduling
Key documents and forms
Step 3 – Many weeks :
2. Planning and Scheduling
Key documents and forms
2.2 Production order : authorizes the manufacture of a
specified quantity of a particular product
2. Planning and Scheduling
Key documents and forms
2.3 Materials requisition : authorizes the removal of
the necessary quantity of raw materials
2. Planning and Scheduling
Key documents and forms

2.4 Move tickets : identify the parts being transferred,

the location to which they are transferred, and the time of
transfer
2. Planning and Scheduling
Threats Controls

5. Planning and scheduling -Production planning

activity is over or under systems (C. 5.1)
production -Proper approval and
authorization of production
Over => supply of goods in orders (C. 5.2)
excess of short-run demands => - restricting access to the
creating potential cash flow
production scheduling
problems
program (c. 5.3).
Under => lost sales and customer
dissatisfaction.
3. Production Operations
Third step in the production cycle is the actual
manufacture of products

Robots and computer-controlled machinery, is

referred to as computer-integrated
manufacturing (CIM)

=> reduce production costs

=> Accountants need how it affects both
operations and cost accounting.
3. Production Operations
Threats Controls
6. Inventory theft 6.1 Restrict physical access
7. Fixed asset theft 6.2 Documentation of all
8. Poor performance inventory movement
6.3 Segregation of custody duties
9. Suboptimal investments in from recording and authorization
fixed assets of removal …
10. Loss of inventory or fixed 7.2 Restrict access to fixed assets
assets due to fire or disasters 7.3 Keep detailed records of fixed
11. Disruption of operations assets including disposals
8.1 Training
8.2 Performance reporting
9.1 Solicit competitive bids
10.1 Insurance
10.2 physical safeguards
11.1 Backup and disaster
recovery
Cost Accounting Systems
Three principal objectives of the cost
accounting system :

• Provide information for planning, controlling, and

evaluating the performance of production
operations
• Provide accurate cost data about products for use
in pricing and product mix decisions
• Collect and process the information used to
calculate the inventory and cost of goods sold values
that appear in organization’s financials
4. Cost Accounting
Process
Job-order costing assigns costs to specific
production batches, or jobs
Use in case : product or service being sold
consists of
discretely identifiable items (for example : each
house being built)
Process costing assigns costs to each process, or
work center, in the production cycle
Use in case : similar goods or services are produced
in mass quantities and discrete units cannot be readily
identified (for example : Breweries)
 4. Cost Accounting Process
Choice of job-order or process costing affects only the
method used to assign costs to products, not the
methods used to collect that data.
 RAW MATERIALS USAGE DATA
issuance of a materials requisition triggers a debit to work in
process for the raw materials sent to production.
 DIRECT LABOR COSTS
job-time ticket to collect data about labor activity
 MACHINERY AND EQUIPMENT USAGE
CIM : data about machinery and equipment usage are
collected at each step in the production process, often
in conjunction with data about labor costs.
 MANUFACTURING OVERHEAD COSTS

Accountants can play a key role in controlling overhead

costs
4. Cost Accounting

Threats Controls
1. Inaccurate cost data (Th.12) 1 a. Source data automation
2. Inappropriate allocation of (C.12.1)
overhead costs (Th.13) b. Data processing
3. Misleading reports (Th.14) integrity controls (C12.2)
2 a. Time-driven activity-
based costing (C. 13.1)
3 a. Performance metrics
IMPROVED CONTROL WITH ACTIVITY-BASED
SYSTEMS (Control 13.1)
COSTING
Activity-based costing systems differ from
conventional cost accounting systems in three
important ways :
1.Attempt to directly trace a larger proportion
of
overhead costs to products
2.Use a greater number of cost pools to accumulate
indirect costs (manufacturing overhead)
 Batch-related overhead.
 Product-related overhead
 Companywide overhead
3.Attempt to rationalize the allocation of overhead
to products by identifying cost drivers (any thing that
IMPROVED CONTROL WITH ACTIVITY-BASED
SYSTEMS (Control 13.1)
COSTING

Activity-based costing provides two important

benefits :
 Better Decisions
 Avoid overprice or underprice because overhead is divided into three
categories and applied using cost drivers. Therefore, product cost data
are more accurate.
 Makes better use of production data to improve product design

 Improved Cost Management

Activity-based cost systems measure both the amount spent to acquire
resources and the consumption of those resources.

Cost of activity capability = Cost of activity used + Cost of unused capacity

IMPROVED CONTROL WITH INNOVATIVE
PERFORMANCE
METRICS
Traditional financial accounting treats inventory as an asset.
Thus, the costs of producing inventory are not recognized
until the products are sold.

When a company switches from mass production to lean

manufacturing, it reduces existing inventory levels, with the
result that costs incurred in prior periods to create that
inventory are now expensed.

Lean manufacturing seeks to minimize the creation of

additional inventories, almost all labor and overhead costs
are expensed in the current period.
IMPROVED CONTROL WITH INNOVATIVE
PERFORMANCE METRICS

CPAs have adopted lean manufacturing techniques advocate

supplementing traditional financial reports based on
Generally Accepted Privacy Principles (GAAP) with
additional reports based on lean-accounting
principles
One suggested change involves assigning costs to product
lines instead of departments.
For example, all the costs incurred to design, produce, sell,
deliver, process customer payments, and provide post-sales
support are grouped by product.
Another change involves reporting overhead costs as a
separate item, rather than including them in the
calculation of the costs of goold sold.
IMPROVED CONTROL WITH INNOVATIVE
PERFORMANCE METRICS
Two particularly important issues are the level of usable
output produced per unit of time and measures of quality
control.
1.Throughput: A Measure of Production
Effectiveness
Throughput = (Total units produced / Processing
time)
X (Processing time / Total time) X
(Good units (nondefective)/ Total
units)
2. Quality Control Measures can be divided
into four
areas :
 Prevention costs
 Inspection costs
Key Terms

• Production cycle • Computer-integrated

• Bill of materials manufacturing (CIM)
• Operations list • Request for proposal
• Manufacturing resource (RFP)
planning (MRP-II) • Job-order costing
• Lean manufacturing • Process costing
• Master production schedule • Job-time ticket
(MPS) • Manufacturing
• Production order overhead
• Materials requisition • Activity-based
• Move ticket costing
• Cost driver
• Throughput