ACCT 373: Chapter 16 - Production Cycle

Production cycle

The recurring set of business activities and related information-processing operations associated with manufacturing products.

Four basic production cycle activities

Product design; planning and scheduling; production operations; and cost accounting.

Production cycle objective

Manufacture products that meet customer requirements and anticipated demand while minimizing production costs.

Bill of materials (BOM)

A document specifying the part number, description, and quantity of each component used to produce a finished product.

Operations list

A document specifying the sequence of production steps, necessary equipment, and production timing required to manufacture a product.

Product life-cycle management (PLM)

Software that improves the efficiency and effectiveness of product design by integrating tools such as CAD, digital manufacturing software, and product data management.

Computer-aided design (CAD)

Software used to design and test virtual product models, helping reduce the need for physical prototypes and improve product design.

Manufacturing resource planning (MRP-II)

A production-planning approach that balances production capacity and raw-material requirements with forecasted sales demand; it is generally considered push manufacturing.

Push manufacturing

Producing goods in expectation of customer demand, as is typically done under MRP-II.

Lean manufacturing

A production approach that extends just-in-time principles throughout the production process to minimize inventories and eliminate waste.

Pull manufacturing

Producing goods in response to actual customer demand, as is typically done under lean manufacturing.

Master production schedule (MPS)

A schedule specifying how much of each product is to be produced during the planning period and when production should occur.

Exploding the bill of materials

The process of determining total component requirements by multiplying the quantity of each component needed per product by the number of products scheduled for production and combining requirements across products.

Production order

A document that authorizes the manufacture of a specified quantity of a particular product and identifies the operations, quantities, locations, and timing involved.

Materials requisition

A document that authorizes the removal of the necessary quantity of raw materials from inventory for use in production.

Move ticket

A document that identifies the parts or materials being transferred, the location to which they are transferred, and the time of transfer.

Bar-coding and RFID in production

Source-data technologies used to improve the efficiency and accuracy of tracking the movement and usage of raw materials while reducing manual data entry.

Computer-integrated manufacturing (CIM)

An approach in which the manufacturing process is performed and monitored by computerized equipment, such as robots and Internet of Things-enabled devices.

Request for proposal (RFP)

A formal document used to solicit competitive bids from potential suppliers, particularly for major fixed-asset acquisitions.

Cost accounting system — Objective 1

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

Cost accounting system — Objective 2

Provide accurate product-cost information for pricing and product-mix decisions.

Cost accounting system — Objective 3

Collect and process the information needed to calculate inventory and cost of goods sold amounts reported in the financial statements.

Job-order costing

A costing method that assigns costs to a specific production job or batch.

Process costing

A costing method that assigns costs to each process in the production cycle and calculates an average cost for all units produced.

Job-time ticket

A document used to record the amount of time a worker spends performing a particular production task.

Raw materials usage data

Information about materials placed into production, additional materials issued, unused materials returned, and their effects on work-in-process inventory.

Direct labor costs

Cost information associated with employee time spent performing production activities, traditionally captured with job-time tickets and increasingly collected electronically.

Machinery and equipment usage data

Information about the use of production machinery, such as which equipment was used and how long it operated, often captured automatically in CIM environments.

Manufacturing overhead

Manufacturing costs that cannot be directly traced to a specific job or process, such as utilities, supplies, rent, insurance, property taxes, and factory supervision.

Activity-based costing (ABC)

A costing approach that traces costs to the activities that create them and then allocates those activity costs to products, departments, or other cost objects.

Batch-related overhead

Overhead costs associated with producing a batch, such as setup costs, inspections, and materials handling; these costs are related to the number of batches rather than the number of units produced.

Product-related overhead

Overhead associated with the diversity or support of specific products, such as research and development, expediting, shipping and receiving, environmental requirements, and purchasing.

Company-wide overhead

Overhead costs that benefit the organization as a whole rather than individual products, such as rent and property taxes.

Cost driver

Anything that has a cause-and-effect relationship with costs and can therefore be used to allocate costs more accurately.

Cost of activity capability

The total resources supplied for an activity; it equals the cost of activity used plus the cost of unused capacity.

Unused capacity

The portion of available activity capacity that is not currently being used; ABC can identify this cost separately instead of allocating it to products.

Lean accounting

An approach to internal reporting designed to support lean manufacturing by focusing on product lines, value-producing activities, and the effects of inventory reductions rather than relying only on traditional departmental reports.

Throughput

The number of good units produced during a given period of time; a key measure of production effectiveness.

Throughput formula

Throughput = (Total units produced ÷ Processing time) × (Processing time ÷ Total time) × (Good units ÷ Total units).

Productive capacity

The maximum number of units that can be produced using current production technology during processing time.

Productive processing time

The percentage of total available production time actually spent processing products rather than experiencing downtime, waiting, or delays.

Yield

The percentage of total units produced that are good, nondefective units.

Quality control costs

Costs associated with preventing, detecting, correcting, and responding to product defects; divided into prevention, inspection, internal failure, and external failure costs.

Prevention costs

Costs associated with changes to production processes designed to reduce the product defect rate.

Inspection costs

Costs associated with testing products to ensure that they meet quality standards.

Internal failure costs

Costs of reworking or scrapping defective products identified before they are sold to customers.

External failure costs

Costs arising when defective products are sold to customers, including product liability claims, warranty and repair costs, customer dissatisfaction, and damage to reputation.

Ultimate objective of quality control

To get it right the first time by manufacturing products that meet customer specifications while managing trade-offs among the four quality-cost categories.

General Issues — Inaccurate or invalid master data

Controls: Data-processing integrity controls; restriction of access to master data; review of all changes to master data.

General Issues — Unauthorized disclosure of sensitive information

Controls: Access controls; encryption.

General Issues — Loss or destruction of data

Control: Backup and disaster-recovery procedures.

Product Design — Poor product design resulting in excess costs

Controls: Analysis of costs arising from product-design choices; analysis of warranty and repair costs.

Planning and Scheduling — Overproduction and underproduction

Controls: Production-planning systems; review and approval of production schedules and orders; restriction of access to production orders and production schedules.

Production Operations — Theft of inventory

Controls: Physical access controls; documentation of all inventory movement; segregation of duties by separating custody of assets from recording and authorization of removal; restriction of access to inventory master data; periodic physical inventory counts and reconciliation to recorded quantities.

Production Operations — Theft of fixed assets

Controls: Physical inventory of all fixed assets; restriction of physical access to fixed assets; maintaining detailed records of fixed assets, including disposal.

Production Operations — Poor performance

Controls: Training; performance reports.

Production Operations — Suboptimal investments in fixed assets

Control: Proper approval of fixed-asset acquisitions, including use of requests for proposals to solicit multiple competitive bids.

Production Operations — Loss of inventory or fixed assets due to fire or other disasters

Controls: Physical safeguards; insurance.

Production Operations — Disruption of operations

Controls: Backup and disaster-recovery plans; network and logical access controls.

Cost Accounting — Inaccurate cost data

Controls: Source-data automation; data-processing integrity controls.

Cost Accounting — Inappropriate allocation of overhead costs

Control: Time-driven activity-based costing.

Cost Accounting — Misleading reports

Control: Innovative performance metrics, such as throughput.

Source data automation

Use of technology such as RFID tags, barcodes, scanners, and badge readers to capture production and cost data automatically and improve accuracy.

Data-processing integrity controls

Controls designed to ensure production and cost data are entered, processed, and recorded accurately and completely.

Production planning systems

Systems that use accurate and current sales forecasts, inventory information, production data, and other inputs to reduce the risk of overproduction and underproduction.

Segregation of duties in inventory control

Separating physical custody of inventory from recordkeeping and from authorization of inventory removal to reduce the risk of theft and concealment.

Time-driven activity-based costing

A form of activity-based costing used to improve overhead allocation by relating resource costs to the time required to perform activities.

Activity-based performance reporting

Reporting that organizes costs around the activities responsible for them rather than only traditional general-ledger expense categories, making it easier to identify inefficient or excessive activities.

Traditional costing problem

Traditional systems often allocate overhead using volume-based measures such as direct labor or machine hours even when many overhead costs are driven by other activities, causing products to be overcosted or undercosted.

ABC benefit — Better decisions

More accurate product costs improve pricing, product-mix, product-design, capacity, and other managerial decisions.

ABC benefit — Improved cost management

ABC identifies how resources are consumed by activities and can separately identify unused capacity so management can reduce or redeploy excess resources.

MPS inputs

Customer orders, sales forecasts, and current finished-goods inventory information are used to determine planned production.

MRP-II versus lean manufacturing

MRP-II generally uses longer planning horizons and forecast-driven push production; lean manufacturing generally uses shorter planning horizons and demand-driven pull production.

Product Design — Key source documents

Bill of materials (BOM) and operations list.

Planning and Scheduling — Key source documents

Master production schedule (MPS), production order, materials requisition, and move ticket.

Production Operations — Documents used

Production orders authorize what is produced; materials requisitions authorize raw materials to be taken from inventory; move tickets document the movement of materials and parts through production.

Cost Accounting — Key production information used

Raw materials usage data, direct labor costs, machinery and equipment usage, and manufacturing overhead costs; job-time tickets can be used to record employee time spent on production jobs.