1. Chapter 14
The Production Cycle

2. 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.

3. Production Cycle

4. The Production Cycle
Business activities and information processing activities
Related to manufacturing of products
CIM
Computer integrated manufacturing

5. The Production Cycle
Business activities and information processing activities
Related to manufacturing of products
CIM
Computer integrated manufacturing

6. Production Cycle Activities
Product design
Planning and scheduling
Production operations
Cost accounting

7. Production Cycle General Threats
Inaccurate or invalid master data
Unauthorized disclosure of sensitive information
Loss or destruction of data

8. 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

9. Production Cycle General Controls
Unauthorized disclosure of sensitive information
Access controls
Encryption

10. Production Cycle General Controls
Loss or destruction of data
Backup and disaster recovery procedures

11. 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

12. Product Design Creates two outputs Bill of Materials
Specifies part number, description, and quantity of each component used in a finished product
Operations List

13. 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

14. 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.

15. Product Design Threats
Poor product design resulting in excess costs

16. 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

17. 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.

18. 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

19. 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

20. Planning and Scheduling Threats
Over- or underproduction

21. 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

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

23. 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

24. 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

25. 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

26. Production Operations Controls
Poor performance
Training
Performance reports

27. 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

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

29. Production Operations Controls
Disruption of operations
Backup and disaster recovery plans

30. Cost Accounting Threats
Inaccurate cost data
Inappropriate allocation of overhead costs
Misleading reports

31. Cost Accounting Controls
Inaccurate cost data
Source data automation
Data processing integrity controls

32. Cost Accounting Controls
Inappropriate allocation of overhead costs
Time-driven activity-based costing

33. Cost Accounting Controls
Misleading reports
Innovative performance metrics

34. 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

35. 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.