INTRODUCTION
C HƯƠNG 7
CHU TRÌNH SẢN XUẤT
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INTRODUCTION
• Information flows to the production cycle
from other cycles, e.g.:
– The revenue cycle provides information on
customer orders and sales forecasts for use
in planning production and inventory levels.
– The expenditure cycle provides information
about raw materials acquisitions and
overhead costs.
– The human resources/payroll cycle provides
information about labor costs and availability.
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• The production cycle is a recurring set of
business activities and related data
processing operations associated with the
manufacture of products.
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INTRODUCTION
• Information also flows from the expenditure
cycle:
– The revenue cycle receives information from the
production cycle about finished goods available for
sale.
– The expenditure cycle receives information about raw
materials needs.
– The human resources/payroll cycle receives
information about labor needs.
– The general ledger and reporting system receives
information about cost of goods manufactured.
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 PRODUCTION CYCLE ACTIVITIES PRODUCTION CYCLE ACTIVITIES

• The four basic activities in the production cycle • The four basic activities in the production cycle
are: are:
– Product design – Product design
– Planning and scheduling – Planning and scheduling
– Production operations – Production operations
– Cost accounting – Cost accounting
• Accountants are primarily involved in the fourth • Accountants are primarily involved in the fourth
activity (cost accounting) but must understand activity (cost accounting) but must understand
the other processes well enough to design an the other processes well enough to design an
AIS that provides needed information and AIS that provides needed information and
supports these activities. supports these activities.

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PRODUCT DESIGN PRODUCT DESIGN

• The objective of product design is to • Key documents and forms in product

design a product that strikes the optimal
balance of:
– Meeting customer requirements for quality,
durability, and functionality; and
– Minimizing production costs.
• Simulation software can improve the
efficiency and effectiveness of product
design.
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design:
– Bill of Materials: Lists the components that
are required to build each product, including
part numbers, descriptions,and quantity.
– Operations List: Lists the sequence of steps
required to produce each product, including
the equipment needed and the amount of time
required.
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 PRODUCT DESIGN PRODUCT DESIGN

• Role of the accountant in product design: • Role of the accountant in product design:
– Participate in the design, because 65-80% of – Participate in the
• Compare design,
current because
component usage65-80% of
with projected
usage in alternate designs.
product cost is determined at this stage. product cost is determined at this stage.
• Compare current set-up and handling costs to
– Add value by: – Add value by: costs in alternate designs.
projected
• Designing an AIS that measures and collects the • Provide
• Designing an info
AISon how
that design trade-offs
measures affect the
and collects total
production cost and profitability.
needed data. needed data
• Helping the design team use that data to
• Information about current component usage.
improve profitability
• Information about machine set-up and materials-
handling costs.
• Data on repair and warranty costs to aid in future
modification and design.

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PRODUCTION CYCLE ACTIVITIES PLANNING AND SCHEDULING

• The four basic activities in the production cycle • The objective of the planning and
are:
scheduling activity is to develop a
– Product design
– Planning and scheduling production plan that is efficient enough to
– Production operations meet existing orders and anticipated
– Cost accounting shorter-term demand while minimizing
• Accountants are primarily involved in the fourth inventories of both raw materials and
activity (cost accounting) but must understand finished goods.
the other processes well enough to design an
AIS that provides needed information and
supports these activities.

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 PLANNING AND SCHEDULING PLANNING AND SCHEDULING

• There are two common approachs to • There are two common approaches to
production planning: production planning:
– Manufacturing Resource Planning (MRP-II) – Manufacturing Resource Planning (MRP-II)
– Lean Manufacturing – Lean Manufacturing

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PLANNING AND SCHEDULING PLANNING AND SCHEDULING

• MRP-II is an extension of MRP inventory • There are two common approaches to

control systems: production planning:
– Seeks to balance existing production capacity – Manufacturing Resource Planning (MRP-II)
and raw materials needs to meet forecasted – Lean Manufacturing
sales demands.
– Often referred to as push manufacturing.

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 PLANNING AND SCHEDULING PLANNING AND SCHEDULING

• Lean manufacturing is an extension of the • Comparison of the two systems:

principles of just-in-time inventory
systems:
– Seeks to minimize or eliminate inventories of
raw materials, work in process, and finished
goods.
– Theoretically produces only in response to
customer orders, but in reality, there are
short-run production plans.
– Often referred to as pull manufacturing.
– Both plan production in advance.
– They differ in the length of the planning horizon.
• MRP-II develops plans for up to 12 months ahead.
• Lean manufacturing uses shorter planning horizons.
– Consequently:
• MRP-II is more appropriate for products with
predictable demand and a long life cycle.
• Lean manufacturing more appropriate for products with
unpredictable demand, short life cycles, and frequent
markdowns of excess inventory.

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PLANNING AND SCHEDULING PLANNING AND SCHEDULING

• Key documents and forms: • Key documents and forms:

– Master production schedule – Master production schedule
• Specifies how much of each product is to be produced during the
period and when.
– Production order
• Uses information about customer orders, sales forecasts, and finished • Authorizes production of a specified quantity of a
goods inventory levels to determine production levels. product. It lists:
• Although plans can be modified, production plans must be frozen a – Operations to be performed
few weeks in advance to provide time to procure needed materials and
– Quantity to be produced
labor.
– Location for delivery
• Scheduling becomes significantly more complex as the number of
factories increases. • Also collects data about these activities
• Raw materials needs are determined by exploding the bill of materials
to determine amount needed for current production. These amounts
are compared to available levels to determine amounts to be
purchased.
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 PLANNING AND SCHEDULING PLANNING AND SCHEDULING

• Key documents and forms: • Key documents and forms:

– Master production schedule – Master production schedule
– Production order – Production order
– Materials requisition – Materials requisition
• Authorizes movement of the needed materials – Move ticket
from the storeroom to the factory floor.
• Documents the transfer of parts and materials
• This document indicates: throughout the factory.
– Production order number
– Date of issue
– Part numbers and quantities of raw materials
needed (based on data in bill of materials)

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PLANNING AND SCHEDULING PRODUCTION CYCLE ACTIVITIES

• Role of the accountant: • The four basic activities in the production cycle
are:
– Ensure the AIS collects and reports costs in a
– Product design
manner consistent with the company’s – Planning and scheduling
production planning techniques. – Production operations
– Cost accounting
• Accountants are primarily involved in the fourth
activity (cost accounting) but must understand
the other processes well enough to design an
AIS that provides needed information and
supports these activities.

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 PRODUCTION OPERATIONS
• Production operations vary greatly across
companies, depending on the type of product
and the degree of automation.
• The use of various forms of IT, such as robots
and computer-controlled machinery is called
computer-integrated manufacturing (CIM).
– Can significantly reduce production costs.
• Accountants aren’t experts on CIM, but they
must understand how it affects the AIS.
– One effect is a shift from mass production to custom-
order manufacturing and the need to accumulate
costs accordingly.
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PRODUCTION OPERATIONS
• Sharing information across cycles helps
companies be more efficient by timing
purchases to meet the actual demand.
• While the nature of production processes and
the extent of CIM vary, all companies need data
on:
– Raw materials used
– Labor hours expended
– Machine operations performed
– Other manufacturing overhead costs incurred
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PRODUCTION OPERATIONS
• In a lean manufacturing environment, a
customer order triggers several actions:
– System first checks inventory on hand for sufficiency.
– Calculates labor needs and determines whether
overtime or temporary help will be needed.
– Based on bill of materials, determines what
components need to be ordered.
• Necessary purchase orders are sent via EDI.
– The master production schedule is adjusted to include
the new order.
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PRODUCTION CYCLE ACTIVITIES
• The four basic activities in the production cycle
are:
– Product design
– Planning and scheduling
– Production operations
– Cost accounting
• Accountants are primarily involved in the fourth
activity (cost accounting) but must understand
the other processes well enough to design an
AIS that provides needed information and
supports these activities.
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 COST ACCOUNTING COST ACCOUNTING

• The objectives of cost accounting are: • The objectives of cost accounting are:
– To provide information for planning, – To provide information for planning,
controlling, and evaluating the performance of controlling, and evaluating the
production operations; performance of production operations;
– To provide accurate cost data about products • –To
Toaccomplish
provide the accurate cost the
first objective, data AISabout products
must collect real-time
for use in pricing and product mix decisions; data
for on
usethein
performance
pricing and of production
product activities so
mix decisions;
management can make timely decisions.
and and
• RFID technology can be especially helpful, e.g.:
– To collect and process information used to – To collect and
– Broadcasting repairprocess information used to
needs proactively
– Helping in the location of particular items
calculate inventory and COGS values for the calculate inventory and COGS values for the
financial statements. financial statements.
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COST ACCOUNTING COST ACCOUNTING

• To accomplish the 2nd and 3rd objectives, the AIS must collect
• The objectives of cost accounting are:
costs by various categories and assign them to specific • Types of cost accounting systems:
products and organizational units.
• –Requires
To provide
carefulinformation
coding of costfor
dataplanning,
during collection because – Job order costing
controlling,
costs and evaluating
may be allocated the for
in different ways performance of
different reporting
• Assigns costs to a specific production batch or job.
purposes.
production operations; • Used when the product or service consists of discretely
identifiable items.
– To provide accurate cost data about
• Example: Houses
products for use in pricing and product
mix decisions; and
– To collect and process information used to
calculate inventory and COGS values for
the financial statements.
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 COST ACCOUNTING COST ACCOUNTING

• Types of cost accounting systems: • Accounting for Fixed Assets:

– Job order costing – The AIS must collect and process information
– Process costing about the property, plant, and equipment used
• Assigns costs to each process or work center in the in the production cycle.
production cycle – These assets represent a significant portion of
• Calculates the average cost for all units produced
• Used when similar goods or services are produced in
total assets for many companies and need to
mass quantities and discrete units can’t be easily be monitored as an investment.
identified
• Example: Paint

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COST ACCOUNTING COST ACCOUNTING

• The following information should be • The purchase of fixed assets follows the same
maintained about each fixed asset: processes as other purchases in the expenditure
cycle (order à receive à pay).
• ID number • Expected life • But the amounts involved necessitate some
• Serial number • Expected salvage value modification to the process:
• Location • Depreciation method – Competitive bidding
• Cost • Accumulated depreciation • Machinery and equipment purchases almost always
involve a formal request for competitive bids.
• Acquisition date • Improvements
• Vendor info • Maintenance performed

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 COST ACCOUNTING COST ACCOUNTING

• The purchase of fixed assets follows the same • The purchase of fixed assets follows the same
processes as other purchases in the expenditure processes as other purchases in the expenditure
cycle (order à receive à pay). cycle (order à receive à pay).
• But the amounts involved necessitate some • But the amounts involved necessitate some
modification to the process: modification to the process:
– Competitive bidding – Competitive bidding
– Number of people involved – Number of people involved
• More people are likely to be involved in reviewing bids – Payment
for fixed assets.
• Purchases of fixed assets are often paid for in
installments, including interest.

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COST ACCOUNTING COST ACCOUNTING

• The purchase of fixed assets follows the same • The purchase of fixed assets follows the same
processes as other purchases in the expenditure processes as other purchases in the expenditure
cycle (order à receive à pay). cycle (order à receive à pay).
• But the amounts involved necessitate some • But the amounts involved necessitate some
modification to the process: modification to the process:
– Competitive bidding – Competitive bidding
– Number of people involved – Number of people involved
– Payment • The cost of fixed assets justifies more elaborate – Payment
– Controls controls to safeguard them, including: – Controls • It’s critical to formally approve and
– Maintenance of detailed records of each item.
– Disposal accurately record the sale or disposal
– RFID tags to: of fixed assets.
• Monitor location
• Facilitate preventive maintenance 39 of 82 40 of 82

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 COST ACCOUNTING COST ACCOUNTING

• A typical AIS would look something like
the following:
– Product design
• Engineering specifications result in new records
for both the bill of materials and the operations
list file.
• To create these lists, engineering accesses both
files to view designs of similar products.
• They also access the general ledger and
inventory files for info about alternate designs.
• A typical AIS would look something like
the following:
– Product design
– Production planning
• The sales department enters sales forecasts and
customer special order information.
• Production planning uses that information and
data on current inventory levels to develop a
master production schedule.
• New records are added to the production order
file to authorize the production of goods.

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COST ACCOUNTING COST ACCOUNTING

• A typical AIS would look something like • A typical AIS would look something like
the following: the following:
– Product design – Product design
– Production planning – Production planning
– Cost accounting – Cost accounting
• New records are added to the work-in-process – Production operations
file to accumulate cost data.
• The list of operations to be performed is displayed at
workstations.
• Instructions are also sent to the CIM interface to guide
operation of machinery and robots.
• Materials requisitions are sent to inventory stores to authorize
release of raw materials to production.
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COST ACCOUNTING
• Such a system can be used for a job-order or
process costing system.
• Both require that data be accumulated about:
– Raw materials
– Direct labor
– Machinery and equipment usage
– Manufacturing overhead
• The choice of method:
– Does not affect how data are collected
– Does affect how costs are assigned to products
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CONTROL: OBJECTIVES,
THREATS, AND PROCEDURES
• There are several actions a company can take
with respect to any cycle to reduce threats of
errors or irregularities. These include:
– Using simple, easy-to-complete documents with
clear instructions (enhances accuracy and
reliability).
– Using appropriate application controls, such as
validity checks and field checks (enhances
accuracy and reliability).
– Providing space on forms to record who completed
and who reviewed the form (encourages proper
authorizations and accountability).
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CONTROL: OBJECTIVES,
THREATS, AND PROCEDURES
• In the production cycle (or any cycle), a well-designed
AIS should provide adequate controls to ensure that the
following objectives are met:
– All transactions are properly authorized
– All recorded transactions are valid
– All valid and authorized transactions are recorded
– All transactions are recorded accurately
– Assets are safeguarded from loss or theft
– Business activities are performed efficiently and effectively
– The company is in compliance with all applicable laws and
regulations
– All disclosures are full and fair
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CONTROL: OBJECTIVES,
THREATS, AND PROCEDURES
– Pre-numbering documents (encourages recording
of valid and only valid transactions).
– Restricting access to blank documents (reduces
risk of unauthorized transaction).
– Using RFID tags when feasible to improve data
entry accuracy.
• In the following sections, we’ll discuss the
threats that may arise in the four major steps of
the production cycle, as well as general
threats, EDI-related threats, and threats related
to purchases of services.
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 THREATS IN PRODUCT DESIGN THREATS IN PRODUCT DESIGN

• The major threats in the product design • THREAT NO. 1—POOR PRODUCT DESIGN
process is: – Why is this a problem?
• Higher materials purchasing and carrying costs
– THREAT 1: Poor Product Design • Costs for inefficient production
• You can click on the threat above to get more • Higher repair and warranty costs
information on: – Controls:
– The types of problems posed by each threat • Accurate data about the relationship between
– The controls that can mitigate the threat components and finished goods.
• Analysis of warranty and repair costs to identify
primary causes of product failure to be used in re-
designing product.
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THREATS IN PLANNING AND THREATS IN PLANNING AND

SCHEDULING SCHEDULING
• Threats in the planning and scheduling • THREAT NO. 2—OVER- OR UNDER-
process include: PRODUCTION
– THREAT 2: Over- or Under-Production – Why is this a problem?
• Over-production may result in:
– THREAT 3: Suboptimal Investment in – Excess goods for short-run demand and potential cash
Fixed Assets flow problems
• You can click on any of the threats above to get – Obsolete inventory
more information on: • Under-production may result in:
– The types of problems posed by each threat – Lost sales
– The controls that can mitigate the threats.
– Customer dissatisfaction

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 THREATS IN PLANNING AND THREATS IN PLANNING AND
SCHEDULING SCHEDULING
– Controls: • THREAT NO. 3—SUBOPTIMAL
• More accurate production planning, including accurate INVESTMENT IN FIXED ASSETS
and current:
– Sales forecasts
– Why is this a problem?
– Inventory data • Over-investment causes excess costs
• Investments in production planning • Under-investment impairs productivity
• Regular collection of data on production – Controls:
performance to adjust production schedule • Proper authorization of fixed asset transactions:
• Proper authorization of production orders – Larger purchases should be reviewed by a senior
• Restriction of access to production scheduling executive or executive committee.
program – Smaller purchases (<$10,000) can be handled with
departmental budgets, with managers being held
• Validity checks on production orders responsible for department return.
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THREATS IN PLANNING AND THREATS IN PRODUCTION

SCHEDULING OPERATIONS
– Competitive bids should be sought via requests for
proposals (RFPs)
• Threats in the production operations
» The capital investment committee should review and process include:
select the winning bid.
– Once a supplier is selected, acquisition may be handled
– THREAT 4: Theft of Inventories and Fixed
through the expenditure cycle process. Assets
– THREAT 5: Disruption of Operations
• You can click on any of the threats above to get
more information on:
– The types of problems posed by each threat
– The controls that can mitigate the threats.

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 THREATS IN PRODUCTION THREATS IN PRODUCTION
OPERATIONS OPERATIONS
• THREAT NO. 4—THEFT OF INVENTORIES • Materials requisitions should be used to authorize
AND FIXED ASSETS release of raw materials.
– Should be signed by both inventory control clerk and
– Why is this a problem? production employee to establish accountability.
• Loss of assets • Requests in excess of the bill of materials should
• Mis-stated financial data be documented and have supervisory
• Potential underproduction of inventory authorization.
• RFID tags and bar codes can be used to track
– Controls:
inventory through production.
• Physical access to inventory should be restricted.
• All internal movement of inventory should be
documented.

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THREATS IN PRODUCTION THREATS IN PRODUCTION

OPERATIONS OPERATIONS
• Proper segregation of duties should be enforced: • Managers should be held accountable for assets
– Inventory stores has custody of raw materials and under their control.
finished goods. • Fixed assets should be physically secured.
– Factory supervisors are responsible for work in process.
• Disposal of assets should be authorized and
– Authorization of production orders, materials requisitions,
and move tickets, should be done by production planners documented.
or the information system. • Periodic reports of fixed asset transactions should
• Logical and physical access controls should be be reviewed by the controller.
enforced for production records. • Adequate insurance should be maintained.
• An independent party should count inventory and
investigate discrepancies.
• Fixed assets must be identified and recorded. Return to Go To
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 THREATS IN PRODUCTION
OPERATIONS
THREATS IN COST ACCOUNTING

• THREAT NO. 5—DISRUPTION OF • Threats in the cost accounting process

OPERATIONS include:
– Why is this a problem?
• Disasters can disrupt functioning and destroy – THREAT 6: Inaccurate Recording and
assets Processing of Production Activity Data
– Controls: • You can click on the threat above to get more
information on:
• Backup power sources, such as generators and
– The types of problems posed by the threat
uninterruptible power supplies
– The controls that can mitigate the threat
• Investigate disaster preparedness of key suppliers
and identify alternative sources for critical
components
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THREATS IN COST ACCOUNTING THREATS IN COST ACCOUNTING

• THREAT 6--INACCURATE RECORDING • Use online terminals for data entry.

AND PROCESSING OF PRODUCTION • Restrict access with passwords, user IDs, and
ACTIVITY DATA access control matrices to prevent unauthorized
– Why is this a problem? changes to data.
• Diminishes effectiveness of production scheduling • Use check digits, closed-loop verification, and
• Undermines management’s ability to monitor and validity checks.
control operations • Do periodic physical counts of inventory and
– Controls: compare to records.
• Automate data collection with RFID technology, • Do periodic inspections and counts of fixed assets.
bar code scanners, and badge readers to ensure
accurate data entry.
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 • You can click on any of the threats below to get
more information on:
GENERAL THREATS
– The types of problems posed by each threat GENERAL THREATS
– The controls that can mitigate the threats.

• Two general objectives pertain to activities • THREAT NO. 7: LOSS, ALTERATION, OR

in every cycle: UNAUTHORIZED DISCLOSURE OF DATA
– Accurate data should be available when needed – Why is this a problem?
– Activities should be performed efficiently and • Loss or alteration of data could cause:
effectively – Errors in external or internal reporting.
• Threats in the process of ordering goods • Unauthorized disclosure of confidential information
can cause:
include:
– Unfair competition
– THREAT 7: Loss, Alteration, or Unauthorized – Loss of business
Disclosure of Data
– THREAT 8: Poor Performance

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GENERAL THREATS GENERAL THREATS

• Controls: – Access controls should be utilized

– All data files and key master files should be backed • User IDs and passwords
up regularly. • Compatibility matrices
• At least one backup on site and one offsite. • Controls for individual terminals (e.g., so the receiving
dock can’t enter a sales order).
– All disks and tapes should have external and internal
• Logs of all activities, particularly those requiring specific
file labels to reduce chance of accidentally erasing
authorizations, should be maintained.
important data.
– Default settings on ERP systems usually allow users
far too much access to data, so these systems must
be modified to enforce proper segregation of duties.

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 GENERAL THREATS GENERAL THREATS

– Sensitive data should be encrypted in storage and in • THREAT NO. 8--POOR PERFORMANCE
transmission. – Why is this a problem?
– Parity checks, acknowledgment messages, and • Quality control problems increase expenses and
control totals should be used to ensure transmission reduce future sales
accuracy.
– Controls:
• Prepare and review performance reports

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PRODUCTION CYCLE INFORMATION PRODUCTION CYCLE INFORMATION

NEEDS NEEDS
• In a manufacturing environment, the focus • In traditional systems, this type of data
must be on total quality management. was not well linked with financial data, and
Managers need info on: cost accounting systems were separate
– Defect rates from production operations information
– Breakdown frequency systems.
– Percent of finished goods needing rework • However, both financial and operating
– Percent of defects discovered by customers information are needed to manage and
evaluate these activities.

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 THROUGHPUT: A MEASURE OF THROUGHPUT: A MEASURE OF
PRODUCTION EFFECTIVENESS PRODUCTION EFFECTIVENESS
• Throughput = Productive Capacity x • Throughput = Productive Capacity x
Productive Processing Time x Yield Productive Processing Time x Yield
– Productive Capacity = Total Units – Productive Capacity = Total Units Produced /
Produced / Processing Time Processing Time
• Can be improved by: – Productive Processing Time = Processing
– Improving machine or labor efficiency. Time / Total Time
– Improving factory layout.
– Simplifying product design specifications. • The opposite of downtime.
• Can be improved by:
– Better maintenance to reduce machine downtime.
– Better scheduling of deliveries to reduce wait time.

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THROUGHPUT: A MEASURE OF THROUGHPUT: A MEASURE OF

PRODUCTION EFFECTIVENESS PRODUCTION EFFECTIVENESS
• Throughput = Productive Capacity x • Throughput = Productive Capacity x Productive
Processing Time x Yield
Productive Processing Time x Yield – Productive Capacity = Total Units Produced / Processing Time
– Productive Capacity = Total Units Produced / – Productive Processing Time = Processing Time / Total Time
Processing Time – Yield = Good Units / Total Units
• EXAMPLE: Manster Co. produced 1,000 bottles of Zithmowash
– Productive Processing Time = Processing in a 10-hour period. During this period there was a total of 1
Time / Total Time hour of machine downtime and waiting time for materials. One
– Yield = Good Units / Total Units hundred of the bottles were defective.
– PRODUCTIVE CAPACITY = 1,000 bottles / 9 productive hours =
• Can be improved by: 111.11 bottles / hour.
– Using better raw materials – PRODUCTIVE PROCESSING TIME = 9 productive hours / 10 total
– Improving worker skills hours = .90.
– YIELD = 900 good units / 1,000 total units = .90
– THROUGHPUT = 111.11 x .90 x .90 = 90.
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 QUALITY CONTROL QUALITY CONTROL

• Information About Quality Control • Information About Quality Control

–Quality control costs can be divided –Quality control costs can be divided
into four categories: into four categories:
• Prevention costs • Prevention costs
• Costs incurred to reduce product defect rates. • Inspection costs
• Costs incurred to ensure products meet quality
standards.

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QUALITY CONTROL QUALITY CONTROL

• Information About Quality Control • Information About Quality Control

–Quality control costs can be divided –Quality control costs can be divided
into four categories: into four categories:
• Costs when defective products are sold to
• Prevention costs • Prevention costs
customers, e.g., warranty and repair costs,
• Inspection costs • Inspection costs costs, costs of customer
product liability
• Internal failure costs • dissatisfaction and damage to reputation.
Internal failure costs
• Costs of rework and scrap when products are • External failure costs
identified as defective prior to sale.

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 QUALITY CONTROL
• Information About Quality Control
–Quality control costs can be divided
into four categories:
• Prevention costs
• Inspection costs
• Internal failure costs
• External failure costs
– The objective of quality control is to
minimize the sum of these four costs.
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SUMMARY
• You’ve learned about the basic business
activities and data processing operations that
are performed in the production cycle, including:
– Product design
– Production planning and scheduling
– Production operations
– Cost accounting
• You’ve learned how IT can improve the
efficiency and effectiveness of these processes.
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