Polytechnic University of the Philippines

College of Accountancy and Finance

Sta. Mesa, Manila

Republic of the Philippines

Chapter 14: The Production Cycle

Acosta, Mark Louie A.

David, Jomelyn Marie L.

Romero, Lester V.

BSA 3-11

Prof. Ryan Roque

I. INTRODUCTION

• Questions to be addressed in this chapter include:

–What are the basic business activities and data processing operations that are

performed in the production cycle?

–What decisions need to be made in the production cycle, and what information

is needed to make these decisions?

–How can the company’s cost accounting system help in achieving the entity’s

objectives?

–What are the major threats in the production cycle and the controls that can

mitigate those threats?

• The production cycle is a recurring set of business activities and related data

processing operations associated with the manufacture of products.

• Information flows to the production cycle from other cycles. 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.

• 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.

• Decisions that must be made in the production cycle include decisions on product

mix, pricing, resource allocation, cost management, and performance evaluation.

II. BODY

Production Cycle Process

• Product Design

• Planning and Scheduling

• Production Operations

• Cost Accounting

A. Product Design

• Goal: Is to create a product with quality, durability, functionality - while minimizing costs

• What does it produce?

a. Bill of Materials - Contains quantity, part number, description of each component

used in a finished good (ingredients)

b. Operations List - specifies the sequence of steps to follow in making the product ----

recipe

Threats: Controls:
1. Poor product design 1. accountants participate in product
(excess costs) design choices

2. too many unique 2. analysis of warranty and repair

components raises costs costs - suggest improvement

1. complexity - hard to change

in the future

2. high warranty and repair

costs

• Simulation Software

Products vary in size, shape, complexity, and usage so it’s hard to generalize

anything about product design. The processes by which companies create new

products, however, are typically the same. First they define what the product will do

(product specifications), and then they capture all of the things that will define the

product (design intent).

• Once that has been agreed upon, the design team creates detailed designs and

tests these burgeoning product ideas to see if they actually behave in the real world

the way in which they are designed. When or if they don’t, changes are made to the

design and they are tested again. This testing was once conducted using physical

prototypes, which is both costly and time-consuming to conduct.

• Today this process is very different and more efficient, thanks to virtual testing using

simulation software. Digital models are now put through their paces in virtual

prototyping environments using simulation software, such as finite element analysis

(FEA) or computational fluid dynamics (CFD). Often later in the cycle, physical

prototyping testing is used to confirm the simulation results so product designs can

be moved onto manufacturing.

 B. Planning and Scheduling

• Goal: Develop a production plan efficient enough to meet existing orders and

anticipated short-term demand while minimizing inventories of both raw materials and

finished goods

• Methods: MRP2 or Lean Manufacturing

Threats: Controls:
1. Poor product design 1. a. Analysis of costs arising from product
resulting in excess costs design choices
2. Over and under
b. Analysis of warranty and
production
repair costs

2. a. Production planning systems

b. Review and approve production

orders and schedules

c. Restrict access to orders and

schedules

• Lean Manufacturing

-extension of JIT - minimize or eliminate inventories of RM, WIP, FG

-PULL manufacturing - goods are produced or pulled in response to customer demand

• MRPII

-an extension of an MRP - seeks to balance existing production capacity and raw

materials needs to meet forecasted sales demands

-PUSH manufacturing - produced in expectation of customer demand

• MPS

-master production schedule -how much of each product is to be produced during the

planning period and when the production should occur -"explode" MPS -

individual/immediate RM requirements
• Production Order

-authorizes the manufacture of a specified quantity of a particular product

-lists operation to be performed -quantity produced -where to be delivered -start and

end of process

• Materials requisition

-authorizes removal of RM from storeroom to other part of factory

• Move ticket

- transfers of RM recorded on move tickets - identify parts being transferred, location of

transfer, time of transfer

C. Production Operations

• Goal: The actual manufacturing of products

• Method: CIM
Controls:
Threats:
1. a. Restrict physical access
1. Inventory theft
b. Document movement of
2. Fixed asset theft inventory

3. Poor performance c. Segregation of custody duties

from authorization and
4. Suboptimal investments in fixed assets recording

5. Loss of inventory or fixed assets due to 2. a. Restrict access to fixed assets

fire or disasters
b. Keep detailed records of fixed
6. Disruption of operations assets including disposals

3. a. Performance reporting

4 . a. Solicit competitive bids

5. a. Insurance and physical

Safeguards

6. a. Backup and disaster recovery

 • RFP Request For Proposal - calls for competitive bids by potential suppliers

• CIM - Computer Integrated Manufacturing -IT in production process -robots and

computer controlled machinery

D. Cost Accounting

• Goals:

1. to provide information for planning, controlling, and evaluating the performance of

production operations

2. to provide accurate cost data about products for use in pricing and product mix

decisions

3. to collect and process the information used to calculate the inventory and cost of

goods sold values that appear in the company's financial statements

• Methods: -job order costing -process costing

Threats: Controls:
1. Inaccurate cost data 1. a. Source data automation

2. Inappropriate allocation of b. Data processing integrity

overhead costs controls

3. Misleading reports 2. a. Time-driven activity-based

Costing

3. a. Performance metrics

• Job order costing -assigns costs to specific production batches, or jobs, and is used when

the product or service is being sold consists of discretely identifiable items

-EX - house - individual audit

• Process costing -assigns costs to each process or work center in the production cycle and

then calculates the average cost for all units produced

-used when similar goods or services are produced in mass quantities

• Manufacturing overhead -manufacturing costs that are not economically feasible to trace

directly to specific jobs or processes.

ex. cost of water, power, utilities, rent, insurance, taxes on factory plan, salary of factory

supervisors

• Activity based costing -can refine and improve cost allocations under job order and

process cost systems

-attempts to trace costs to the activities that create them, such as grinding or polishing, and

only subsequently allocates those costs to products or departments

• DIFFERS from other cost accounting systems:

1. attempt to directly trace a larger proportion of overhead costs to products

2. activity based cost systems use a greater number of cost pools to accumulate indirect

costs(manufacturing overhead) - 3 separate categories of overhead

-Batch-related overhead - setup costs, inspections, materials handling

-Product-related overhead - related to the diversity of the company's product line. R+D,

expediting, shipping, receiving, environmental regulations, purchasing - link to specific

products when possible.

-Companywide overhead - rent, property, or taxes.

3. activity based cost systems attempt to rationalize the allocation of overhead to products

by identifying cost drivers.

OVERALL BENEFITS:

1. more accurate cost data result in better product mix and pricing decisions

2. more detailed cost data improve management's ability to control and manage total costs.

• Cost drivers - anything that has a cause-and-effect relationship on costs

Cost Accounting Systems

a. Provide information for planning, controlling, and evaluating the performance of production

operations

b. Provide accurate cost data about products for use in pricing and product mix decisions

c. Collect and process the information used to calculate the inventory and cost of goods sold

values that appear in organization’s financial system.

III. SUMMARY

 Product Design
o Source documents: Master production schedule, production order, and
materials requisition
 Planning and Scheduling
o Source documents: bill of materials and operations list
 Productions Operation
o Actual Manufacturing of Products
 Cost Accounting
o to provide information for planning, controlling, and evaluating the
performance of production operations
o to provide accurate cost data about products for use in pricing and
product mix decisions
o to collect and process the information used to calculate the inventory and
cost of goods sold values that appear in the company's financial
statements

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