Chapter 14The Production Cycle

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Learning Objectives

Describe the major business activities and related information processing operations performed in the production cycle.

Identify major threats in the production cycle and evaluate the adequacy of various control procedures for dealing with those threats.

Explain how a company’s cost accounting system can help it achieve its manufacturing goals.

Discuss the key decisions that must be made in the production cycle and identify the information required to make those decisions.

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Production Cycle

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The Production Cycle

Business activities and information processing activities Related to manufacturing of products

CIM Computer integrated manufacturing

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The Production Cycle

Business activities and information processing activities Related to manufacturing of products

CIM Computer integrated manufacturing

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Production Cycle Activities

1. Product design

2. Planning and scheduling

3. Production operations

4. Cost accounting

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Production Cycle General Threats

Inaccurate or invalid master data

Unauthorized disclosure of sensitive information

Loss or destruction of data

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Production Cycle General Controls

Inaccurate or invalid master data Data processing integrity controls Restriction of access to master data Review of all changes to master data

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Production Cycle General Controls

Unauthorized disclosure of sensitive information Access controls Encryption

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Production Cycle General Controls

Loss or destruction of data Backup and disaster recovery procedures

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Product Design

Create a Product that meets a customer’s requirement Quality Durability Functionality Minimize production cost

Creates two outputs Bill of Materials Operations List

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Product Design

Creates two outputs Bill of Materials

Specifies part number, description, and quantity of each component used in a finished product

Operations List

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Product Design

Creates two outputs Bill of Materials Operations List

Specifies the sequence of steps to follow in making the product, which equipment to use, and how long each step should take

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Product Design

Product life-cycle management (PLM) software Helps improve the efficiency and effectiveness of the

product design process

Three key components Computer aided design (CAD) software to design new

products. Digital manufacturing software that simulates how those

products will be manufactured. Product data management software that stores all data

associated with products.

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Product Design Threats

Poor product design resulting in excess costs

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Product Design Controls

Poor product design resulting in excess costs Accounting analysis of costs arising from product design

choices Analysis of warranty and repair costs

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Planning and Scheduling

Two common methods of production planning Manufacturing resource planning

Balance existing production capacity and raw materials needs to meet forecasted sales demands.

Push Manufacturing Goods are produced in expectations of customer

demand. Lean Manufacturing

Just in time inventory Goal is to eliminate inventories of raw materials, and

finished goods Pull manufacturing

Goods are produced in response to customer orders.

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Planning and Scheduling

Master Production schedule (MPS) Contains information about customer orders, sales

forecast, and inventory levels of finished goods Specifies

How much product to produce When to produce

Used to develop a detailed timetable that specifies daily production, and raw materials needed.

Production order Lists the operations to be performed Quantity to be produce Delivery location

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Planning and Scheduling

Materials requisition Authorizes the removal of the necessary quantity of raw

materials Contains detailed information about the raw materials

used Order number Date of issue Part numbers quantities

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Planning and Scheduling Threats

Over- or underproduction

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Planning and Scheduling Controls

Over- or underproduction Production planning systems Review and approval of production schedules and orders Restriction of access to production orders and production

schedules

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Production Operations

Computer Integrated manufacturing (CIM) Various forms of IT Robots, computer controlled machinery, etc.

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Production Operations Threats

Theft of inventory

Theft of fixed asset

Poor performance

Suboptimal investment in fixed assets

Loss of inventory or fixed assets due to fire or other disasters

Disruption of operations

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Production Operations Controls

Theft of inventory Physical access control Documentation of all inventory movement Segregation of duties—custody of assets from recording

and authorization of removal Restriction of access to inventory master data Periodic physical counts of inventory and reconciliation of

those counts to recorded quantities

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Production Operations Controls

Theft of fixed asset Physical inventory of all fixed assets Restriction of physical access to fixed assets Maintaining detailed records of fixed assets, including

disposal

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Production Operations Controls

Poor performance Training Performance reports

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Production Operations Controls

Suboptimal investment in fixed assets Proper approval of fixed asset acquisitions, including use

of requests for proposals to solicit multiple competitive bids

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Production Operations Controls

Loss of inventory or fixed assets due to fire or other disasters Physical safeguards (e.g., fire sprinklers) Insurance

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Production Operations Controls

Disruption of operations Backup and disaster recovery plans

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Cost Accounting Threats

Inaccurate cost data

Inappropriate allocation of overhead costs

Misleading reports

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Cost Accounting Controls

Inaccurate cost data Source data automation Data processing integrity controls

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Cost Accounting Controls

Inappropriate allocation of overhead costs Time-driven activity-based costing

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Cost Accounting Controls

Misleading reports Innovative performance metrics

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Assigning Production Costs

Job-Order Costing Assigns costs to specific production batches, or jobs

If the product or service is uniquely identifiable

Process Costing Assigns costs to each process, or work center, in the production cycle,

and then calculates the average cost for all units produced. If the product or service is similar and produced in mass quantities

Activity-Based Costing Traces costs to the activities that create them Uses a greater number of overhead pools

Batch Product Organization

Identifies cost drivers Cause-and-effect relationship

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Quality Control Measures

Quality control costs can be divided into four areas: Prevention costs – associated with changes to production

process designed to reduce the product defect rate. Inspection costs – are associated with testing to ensure

that products meet quality standards Internal failure costs – are associated with reworking, or

scrapping, products identified as being defective prior to sale.

External failure costs – result when defective product are sold to customers. They include such costs as product liability claims, warranty and repair expenses, loss of customer satisfaction, and damage to the company’s reputation.

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