1. The Production Cycle
Chapter 14

2. The Production Cycle
Business activities and information processing activities
Related to manufacturing of products

3. Production Cycle

4. 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.

5. INTRODUCTION Information also flows from the production 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.

6. ERP overview

7. Production Cycle Process
Product Design
Source documents:
bill of materials and
operations list
Planning and Scheduling
Master production schedule,
production order, and
materials requisition
Production Operations
Cost Accounting
The production cycle involves activities that are associated with the manufacturing of a product.
The objective is to manufacture a product that meets customer requirements, anticipates the demand for the product, all while minimizing the production costs.

8. Production Cycle Process(Context DFD)
This figure (14-1) from the text shows a context diagram of the production process and how it interrelates with the other transaction processing cycles (Revenue cycle—Chapter 12; expenditure cycle—Chapter 13; human resource cycle—Chapter 15).
Note that the production cycle uses information from many different departments. For example, the engineering department designs the products and the specifications, the marketing and sales departments identify sales forecasts for the product, purchasing sources the raw materials needed to manufacture the product, human resources recruits the personnel for the manufacturing process.

9. Level 0

10. Production Cycle General Threats/Controls
Inaccurate or invalid master data
Control(s)
Data processing integrity controls
Restriction of access to master data
Review of all changes to master data

11. Production Cycle General Threats/Controls
Unauthorized disclosure of sensitive information
Control(s)
Access controls
Encryption

12. Production Cycle General Threats
Loss or destruction of data
Control(s)
Backup and disaster recovery procedures

13. PRODUCT DESIGN
The objective of product design is to design a product that strikes the optimal balance of:
Meeting customer requirements for quality, durability, and functionality; and
Minimizing production costs.

14. PRODUCT DESIGN Key documents and forms in product 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.

15. 1. Product Design 2. Planning and Scheduling
Threats
Controls
Poor product design resulting in excess costs
Over and under production
Over produce
Cash flow issue
Obsolete or
damage
Under produce
Lost sale
Upset customers
1 a. Analysis of costs arising from product design choices b. Analysis of warranty and repair costs 2 a. Production planning systems b. Review and approve production orders and schedules c. Restrict access to orders and

16. PLANNING AND SCHEDULING
The objective of the planning and scheduling activity is to develop a production plan that is efficient enough to meet existing orders and anticipated shorter-term demand while minimizing inventories of both raw materials and finished goods.

17. PLANNING AND SCHEDULING
There are two common approaches to production planning:
Manufacturing Resource Planning (MRP-II)
Lean Manufacturing(JIT)

18. PLANNING AND SCHEDULING
MRP-II is an extension of MRP inventory control systems:
Seeks to balance existing production capacity and raw materials needs to meet forecasted sales demands.
Often referred to as push manufacturing.
Forecast driven

19. PLANNING AND SCHEDULING
Lean manufacturing is an extension of the 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.

20. PLANNING AND SCHEDULING
Key documents and forms:
Master production schedule
Specifies how much of each product is to be produced during the period and when.
Uses information about customer orders, sales forecasts, and finished goods inventory levels to determine production levels.
Although plans can be modified, production plans must be frozen a few weeks in advance to provide time to procure needed materials and labor.
Scheduling becomes significantly more complex as the number of factories increases.
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.

21. PLANNING AND SCHEDULING
Key documents and forms:
Master production schedule
Production order
Authorizes production of a specified quantity of a product. It lists:
Operations to be performed
Quantity to be produced
Location for delivery
Also collects data about these activities,

22. PLANNING AND SCHEDULING
Key documents and forms:
Master production schedule
Production order
Materials requisition
Authorizes movement of the needed materials from the storeroom to the factory floor.
This document indicates:
Production order number
Date of issue
Part numbers and quantities of raw materials needed (based on data in bill of materials)

23. PLANNING AND SCHEDULING
Key documents and forms:
Master production schedule
Production order
Materials requisition
Move ticket
Documents the transfer of parts and materials throughout the factory.

24. 3. Production Operations
Threats
Controls
Inventory theft
Fixed asset theft
Poor performance
1 a. Restrict physical access b. Document movement of inventory c. Segregation of custody duties from authorization and recording d. Restrict access to master data e. Periodic Physical Counts 2 a. Restrict access to fixed assets b. Keep detailed records of fixed assets including disposals c. Physical Counts 3 a. Training b Performance reports

25. 3. Production Operations
Threats
Controls
Suboptimal investments in fixed assets
Loss of inventory or fixed assets due to fire or disasters
Disruption of operations
4 a. Acquisition approval process b. Solicit competitive bids 5 a. Insurance and physical safeguards 6 a. Backup power sources b. Disaster recovery plans c. vendor issues

26. 4. Cost Accounting Systems
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
Cost accounting systems can help organizations achieve their manufacturing goals by these three principal objectives.
Accomplishing the first objective requires that an organization’s cost accounting system collects real-time data about the performance and production activities for management to make timely decisions.
Accomplishing the last two objectives requires organizations to classify and assign costs. Types of costs that are collected and classified are:
Raw materials usage data
Direct labor costs
Machinery and equipment usage
Manufacturing overhead costs
Assigning costs can be done in one of several ways:
Job-order costing: costs assigned to a specific production job or batch
Process costing: costs assigned to each process in the production cycle and averages costs for all units produced
Activity-based costing: tracing costs to the activities

27. 4. Cost Accounting Inaccurate cost data
Threats
Controls
Inaccurate cost data
Inappropriate allocation of overhead costs
Misleading reports
1 a. Source data automation b. Data processing integrity controls 2 a. Time-driven activity-based costing 3 a. Innovative Performance metrics b. Quality control costs i. Prevention ii. Inspection iii. Internal failure iv. External failure