Chapter 14
The 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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